Report on the Economic Prospects for the Automotive

Industry in the UK and Europe

and its Impact on Ford of Dagenham.

Professor Garel Rhys Director, Centre for Automotive Industry Research Cardiff University Business School

October 2000

Contents

Page

Introduction...... 1

General Principles ...... 3 Size is Beautiful...... 4 Lean Production...... 6 Consolidation in the Automotive Industry...... 6 Emerging Markets – Promise or Delusion?...... 10 The Economic Dynamics of the Motor Industry ...... 13 Supply Characteristics ...... 16 Capacity ...... 20 Subsidy and the Automotive Sector: "Buddy Can You Spare a Dime?"...... 22 Round-up of the Economics ...... 25

The Industry...... 26 The Modern Motor Industry: The Challenge of Change...... 27 Vehicle Branding: Or "Can we exploit the consumer?"...... 32 Global Economic Patterns ...... 35 New Manufacturing Centres...... 36 The Competitive Challenge: Who Survives ...... 37 Trucks ...... 39 Conclusion ...... 40 Summary...... 49 Assessment ...... 52 British Car Prices: A Case to Answer...... 52

The Economic Impact...... 56 Industry's Impact: The "Averaged" Position ...... 57 The Economic Significance of the Motor Industry: An Overview of the Past...... 62 The Job and Wealth Impact ...... 63 The Job and Wealth Impact in Detail ...... 64 Ford and Rover Effect ...... 69 Impact of Other Vehicle Manufacture ...... 71 Other Components...... 72 Value of Motor Industry Impact: Summary ...... 73 An Investment Dynamo...... 75 (i) Overall ...... 75 (ii) The Automotive Industry and the UK Regions ...... 76 Qualitative Impact (i): The Role of the Workforce...... 78 Training and Technology ...... 78 Qualitative Impact (ii): Technology, Research and Development...... 82 Qualitative Impact (iii): Efficiency Improvements ...... 85 Products...... 87

i Contents (continued)

Page

Ford ...... 91 Ford in the Scheme of Things: Its Position ...... 92 Why Dagenham? ...... 99 The Impact Effect...... 101 The Job Input ...... 103 "Average" and "Marginal" Correction ...... 105 Local Content Again ...... 106 Regional Impact ...... 106 Competitiveness of Suppliers ...... 107 Pointers from the Rover Saga...... 107 Dagenham’s Future ...... 108 Conclusion ...... 109

ii Report on the Economic Prospects for the Automotive Industry in the UK

and Europe and its Impact on Ford of Dagenham.

Introduction

The motor industry is becoming increasingly integrated on a global basis leave alone in

Europe. In Western Europe in particular the operating environment is the European one even though car companies are located in individual European nation states. Although it is still possible to talk about German, French and Italian motor industries, there is no longer a

"British" motor industry, but a motor industry in Britain. Apart from a number of tiny producers and the newly autonomous Rover, the car manufacturing industry in the UK is in the hands of companies whose headquarters are elsewhere in the world. This is also true for commercial vehicles and increasingly for the top thirty producers of components. Hence, the future of car making in the UK is inexorably bound up with the prosperity of companies over which we have no effective control. To attract and maintain investment, employment and production in these circumstances the UK vehicle industry must be efficient and competitive.

The investment decisions will be based upon an evaluation of the position in the UK and a comparison with the results of expanding or maintaining activities elsewhere.

This means that the economic prospects of the UK and European automobile manufacturing industries are not only important in themselves but have a bearing on the Ford Motor

Company's strategy in Europe, the UK and in particular, Dagenham.

In the modern motor industry the necessary conditions for survival include the best use of resources at any scale of operation (lean production) and equally importantly the size to unlock most if not all economies of scale. In addition a company must also make products

1 the market wants and are willing to pay a profit generating price for. The Japanese in particular are having to learn the latter lesson. However, scale or size is crucial.

2 General Principles

3 Size is Beautiful

The world automotive industry is going through one of its periods of accelerated consolidation. Throughout its history the automotive industry has been characterised by mergers, acquisitions and it must be said liquidations. In other words consolidation and re- structuring has been a regular occurrence where the automotive sector is concerned.

However there are occasions when the degree of consolidation reaches new heights of intensity. This was so in the 1930s, 1960s, and now in the years either side of the millennium. The basic cause of this phenomenon is the attempt to achieve most of the available scale economies to produce a cost base such that an enterprise can be profitable in the most competitive and demanding environment. In short 'lean production' is not enough, a survival strategy depends on achieving world class volumes of output for vehicles and components alike. The firms that will survive the hurricane of competition to which the automotive markets will be exposed in the years ahead will be the lean mass producers. This combines maximum economic efficiency at any given scale of operations with the size of scale needed to minimise the unit costs of production.

During the period from 1960 to 1990 a firm capable of making two million cars and light trucks would enjoy most of the available economies of scale. New evidence is beginning to appear that the minimum efficient scale exceeds three million units. This is because the pursuit of true globalisation requires such a range of models with the attendant research and development, marketing and financial resources that systems and technologies capable of saving unit costs beyond three million units have appeared. In such a world the required level of 'bigness' enters a new dimension.

4 The result is a fresh impetus to comparative growth. The most rapid way of achieving this is through consolidation but at the same time the output leaders can engage in unitary growth to maintain their primacy. Hence the move by General Motors into Eastern Europe, the purchase of Rover by BMW and Volvo by Ford, the "merger" or takeover of Chrysler by

Daimler-Benz, the alliance between Renault and Nissan and even the purchase of Bentley by

Volkswagen, were all motivated by the need to gain extra market or demand on the one hand and volume on the other.

Companies like Daimler, BMW and Volvo have survived by producing products of sufficient differentiation that premium prices could be successfully imposed. However, as the volume producers continuously improve the nature of their products they gradually invade the territory of the specialist producers. This limits the ability of the latter to charge premium prices. Their only solution is to gain size. In the case of Daimler and BMW they took steps to consolidate their position as global specialists and thereby gain more economies of scale.

However, BMW's strategy is largely in ruins following its exit from Rover. In the case of

Renault and Nissan the need was to match the size of larger mass producers, whilst like so many firms before them Volvo needed the protection of a larger enterprise. This illustrates that although joint ventures are theoretically useful, in reality they are a 'second best' way of increasing size.

The expansion plans of companies be it via the consolidation of output in fewer hands or the development of new markets are all the result of market forces which have now spread to the global level. These forces are setting prices. That is, more than ever prices are being determined purely by the market. The ability of firms to insulate themselves from this and

5 charge premium prices is fast diminishing. To be profitable in such a world requires a very large scale of operations in a single enterprise.

Lean Production

Lean production simply means economic efficiency: minimum cost of input for maximum value of output. This ensures strict cost control within a company irrespective of the scale of operation. So whereas size takes a firm to the lowest point on a final cost curve, lean production generates the lowest possible cost curve. The successful firm will be the lean mass producer making acceptable products, perhaps on a global scale. However, scale is still crucial.

Consolidation in the Automotive Industry

Consolidation is the pursuit of ever larger scale, and as already indicated, during the twentieth century every thirty years or so the motor industry experienced periods of particularly rapid change and consolidation. The most recent began in the 1990s and still continues. The last two years particularly has seen consolidation amongst car, commercial vehicle and component makers reach manic proportions.

Although there is still room for further mergers and alliances, already the world motor industry is dominated by six companies. The super league consists of General Motors plus its various alliances with other firms; Ford, including Mazda, Jaguar and Volvo, Daimler-

Chrysler including Mitsubishi and Hyundai, Volkswagen, Toyota and Renault-Nissan including Samsung. There are other significant manufacturers but they are much smaller than the super league members.

6 Fiat, Subaru, Suzuki, Isuzu together with Saab are allied to General Motors like planets around a sun, and Daewoo is up for sale. This leaves Peugeot-Citroen, BMW and Honda, together with Lada, Proton of Malaysia and Maruti of India as companies of any size. Of course there is a long list of other firms such as Porsche and various Russian, Indian and

Chinese enterprises but currently they are either very small or confined to mainly serving their own domestic markets.

So the consolidation process has gone a long way with the six leading groups selling and making over 85% of the world's cars. So whilst Peugeot, BMW and Honda show a determination to remain independent history is against them. This is not to say that they are on the verge of selling out, but the extra efficiency and resource that truly large scale brings will eventually find them lacking. The difference between the size of firms in the Super

League and Division Two is dramatic (Tables 1 and 2).

The consolidation process of the last decade has also affected the truck and bus industry and above all the component making sector. Whilst Western Europe is locked in battle with

North America and Japan for survival in the car industry, the heavy bus and truck market is dominated by Daimler-Chrysler, Volvo, VW-Scania and Iveco. Indeed the latter may push the consolidation process further by absorbing MAN of Germany and Navistar of the USA.

If Western Europe has a comparative advantage in vehicle making then it is in trucks and buses it is to be found. The growing demand for ways to carry goods and the mass transit of people offers an excellent opportunity for this now highly consolidated industry.

Unlike other periods of consolidation in the automotive sector, this one has seen the emergence of massive mergers between component makers. The drive is: to increase

7 economies of scale in an increasingly competitive market, to be able to meet the vehicle firms' every need for product support and; to follow the vehicle firms into the global markets.

It is anticipated that from there being over 5,000 significant component suppliers within a decade most of the business will be in the hands of the top 300 companies operating on a global basis.

The process of consolidation is not conducted for its own sake but represents the need to obtain as many of the available economies of scale as possible. In a world where car prices are increasingly market determined a firm, if it is to be viable, must have the cost structure to allow it to make profits whatever market forces throws at it. So whilst the optimum scale for an assembly plant may be a relatively modest 250,000 cars a year, a state of the art engine plant is optimum at 750,000 units, a press line to stamp out body parts is most efficient at values in excess of one million units whilst marketing, research and development enjoys unit cost reductions at even higher volumes in excess of two million units a year (see below). It is no wonder that even the largest firms still attempt to increase model and part specific volumes through common platform strategies and the like. However this globalisation and consolidation pursues the same objective – the pursuit of ever lower unit costs of production.

In short this demonstrates that whilst lean production where costs are minimised at any given scale is a necessary condition for survival it is not sufficient. The latter needs large scale production and of products that people want.

If consolidation is to cut costs by economies of scale then whilst some benefits come from combining processes and volumes others are only obtained when tough action is taken. In short, firms have to rationalise activities via plant closures and redundancies. In addition despite some attempts to minimise the problem the world automotive industry has excess

8 capacity even when demand booms. This must be tackled at some time. If the massive combines are to make sense and unlock their potential then output and capacity rationalisation is needed notwithstanding the political and public relations backlash involved.

In a world of giant players operating in markets unprotected by tariffs, quotas and other barriers there will be nowhere for the inefficient to hide.

The process of consolidation will continue as the super league firms are still convinced that further cost savings and market penetration is possible. The Volkswagen Group despite its size is still too dependent on Western Europe and Latin America and needs to become a global player like Ford, GM and Toyota and now Daimler-Chrysler and Renault-Nissan. For its part Toyota might find customer resistance as they are confronted by increasing numbers of Toyota-badged vehicles. So both VW and Toyota may find the need for other partners.

GM may wish to add BMW to its portfolio of alliances if it is to contest the onward march of

Ford's Premier Automotive Group. Globally, GM and Ford have used the consolidation of the last decade to re-establish their primacy on a world basis. However, this does not mean success everywhere. As indicated below, Ford in particular is in trouble in Europe as well as

South America.

Next, changes in the vehicle retail world, not least because of the internet, could lead to an accelerated trend to consolidation and perhaps over national frontiers.

Consolidation in the automotive industry has created companies of gigantic size and reach.

The anti-monopoly agencies of the world may well ask where does co-operation and consolidation end and unacceptable market power begin. The European Commission's veto of the Scania-Volvo truck merger was a shot across the bows. So in future whilst economic

9 forces will continue to drive further consolidation the vehicle firms may find it more difficult to put desire into practice. On the other hand there will be new entrants from India, China and Russia. Either way the motor industry will long remain a source of interest and surprise.

However, moves into the emerging markets are not without their dangers.

Table 1: Super League Cars and Light Commercials (Units million) GM "Alliance" including Saab, Isuzu, Suzuki, Subaru and Fiat 12.0 Ford Group including Mazda 7.0 Daimler-Chrysler – Mitsubishi – Hyundai 8.3 Volkswagen 4.9 Toyota – Daihatsu 4.7 Renault-Nissan – Samsung – Dacia 4.6

Source: SMMT data

Table 2: Second Division (Units million) Peugeot-Citroen (PSA) 2.1 Honda 2.1 Daewoo 1.1 BMW 0.6 Lada 0.6 Maruti 0.4 Rover 0.25 Proton 0.2 Porsche 0.050

Source: SMMT data

Emerging Markets – Promise or Delusion?

What car or component maker can resist the blandishments of the emerging markets of the world? Markets that are young but so full of potential. But that is the crucial point – they are markets of "potential". Before that potential is realised many corporate ambitions will be

10 dashed. How many firms will regret their headlong expansion into markets which proved to be no more than a world class way to haemorrhage cash and resources? The world's auto producers are facing a paradox: they must enter the emerging markets of Latin America,

Asia and Eastern Europe if they are to be global companies, but for some the cost of doing so could prove terminal and thereby be part of the consolidation process.

Is this unduly alarmist? I think not when the economic forces that have driven the world's auto industries are looked at. First though let us refresh our memories. In 1975 it was confidently predicted that in twenty years the Brazilian new car market would exceed 4 million sales a year. In fact it has struggled to exceed 1.5 million as economic performance fell far short of expectations. This is a salutary lesson for those expecting the emerging markets to take off and prosper. Any such assumption borders on corporate negligence of the highest order. The conditions needed for a large and growing car market show the need for caution.

Experience shows that mass marketing only occurs when: cars can be made and sold profitably at a low price; income per head must exceed that low price for a family car; there must be a market in consumer credit; and there must be a market in used cars. This being so a few moments reflection shows that the bright picture being drawn about the emerging market takes on an altogether darker shade.

The fragmented nature of production militates against efficient low cost production. In addition there is a battle between domestic local content desires and viable production runs.

The latter often means imports whilst the aspirations of the host government is altogether different wanting to help local, often inefficient, suppliers. In addition per capita income

11 especially in India and China is nowhere near the trigger point for a mass market in cars.

Analysts often delude themselves into believing that the massive populations hide a huge middle class well able to afford cars. This does not seem to be supported in reality, and the definition of an Indian or Chinese middle class is at an income and aspirational level which is at a fraction of 'Western' levels. No matter the current income level, a mass market in cars needs access to future income - consumer credit. In the USA market take-off occurred in the

1920s. In 1924 it was estimated that 75% of cars were bought on credit, also helped by cheap vehicle insurance. Few emerging markets enjoy this feature. Finally car ownership for the masses, "democratic" motoring, is a child of the used car market. This is what makes motoring affordable, and sows the seeds of the new car market of tomorrow. Such a market is almost non-existent in many of the emerging markets. No wonder potential is the name of the game.

By 2010 the markets for cars and domestic use trucks may reach nine million in South

America, Eastern Europe, and Asia outside Japan and Korea. A significant market even when put against the thirty-five million cars and light trucks sold in North America, Western

Europe and Japan. But nearly all the world's auto makers are piling in to these markets with production facilities. History tells us that in the early stages of a country's auto industry there are many players, then there is shake-out and consolidation, leading to an industry with fewer players which then continues to consolidate at a more leisurely pace. When the spot light is turned on markets like India, China and the ASEAN there will be too many players engaged in cut throat competition for many of them to contemplate long term survival even within a global enterprise.

12 So when will these markets start to generate serious profits for the car and component firms?

Probably sometime after 2010. Of course the products that will really pay off quicker will be heavy trucks and buses where the emerging markets are huge by any standards. One thing is certain. There will be more than six global car groups in 2020. By then stand alone, Indian,

Chinese and Russian companies will have joined the ranks. They will remember with gratitude those inward investors who taught them so much but who lost their shirt in the process.

At present the dominant players on a global basis are GM, Ford and Toyota, with Renault-

Nissan and Daimler-Chrysler trying to join them. Such dominance does not allow cross- subsidisation of one part of the globe by another. This is too dangerous a strategy in the ultra-competitive vehicle market of today. In particular Ford is reluctant to divert more funds to finance Ford Europe and Ford South America, at the cost of reducing investment in profitable areas of the world.

The Economic Dynamics of the Motor Industry

The history of the motor industry is one of re-structuring, mergers and takeovers, and in recent years a move to globalisation. The latter means a stage beyond companies being multinational with widespread international activities but with a clearly definable core group of activities, to one where a company operates on a global basis with a whole array of international activities having equal status and being brought together as a critical mass to gain ever greater economies of scale. Indeed, all of the above trends have been driven by the need to obtain competitive cost structures in increasingly demanding and competitive markets. Therefore, to put the structure, behaviour and performance of the motor industry in

13 its proper analytical context needs an examination of supply and demand condition experienced by the industry.

On occasions behaviour in the industry can approach that of a perfectly competitive market, but as product differentiation is a major feature of the industry and the number of major competitors, although large, is under twenty autonomous car companies and even fewer groupings (see Table 3) worldwide, behaviour usually encompasses features of imperfectly competitive and oligopolistic markets. So the behaviour of firms includes the use of price competition but many forms of non-price competition as well. However, despite the latter the price variable cannot be ignored.

Price competition appears either in a long or short term form. In the former, list prices are only changed when models and therefore production costs are changed. In the short run an existing model’s price is altered. Since the war it has been comparatively rare for short run list price to fall independently of sales tax changes, but much more common is the phenomenon of discounts off the list price. However, when the market becomes very weak as it did in the UK in 1990-92 all forms of short run price competition appeared and this has remained as a feature throughout the 1990s and in 2000 in an industry experiencing greater transparency and excess capacity despite the overall recovery of the market.

14 Table 3: Prospects for Consolidation – Surviving Groups: Cars

Ford Daewoo PSA Honda Lincoln Ssanyong Peugeot Acura Mercury Citroen Ford Mazda Toyota Volvo VW Lexus Land Rover VW Daihatsu Jaguar Daimler Audi Seat Skoda Renault-Nissan Bentley Infiniti Bugatti Samsung Lamborghini GM Fuji Chevrolet Saturn BMW Oldsmobile Suzuki Rolls Royce Pontiac Mini Buick Cadillac Holden Mercedes-Chrysler Hyundai Vauxhall/Opel Mitsubishi Kia Saab Asia Isuzu Porsche

Fiat Ferrari Lancia Rover Alfa Romeo MG

Proton - Lotus

Autovaz

New Entrants: - India China Russia

On occasions the price of an existing model changes when the level of specification, and therefore unit costs, alters. It is the variety of specifications offered in cars which leads to the

15 many opportunities for ‘quality-adjusted’ pricing. This can either be regarded as price or non-price competition. This is because the quality adjustment occurs by changing the value of specifications offered in a car, although often both price and product attributes change at the same time.

Clearly, competition in the car industry manifests itself in many ways and with different intensity. Firms do try to increase their market power be it through product differentiation or by actually trying to contain the full operation of market forces. However with price more and more determined by the market, viability means obtaining cost structures that allow profitability. In turn, this means that competition in the car industry cannot be divorced from the structure of the industry or the nature of long and short run supply.

Supply Characteristics

The supply conditions in the motor industry provide an interesting insight into cost behaviour in both the short and long run; that is, the way costs behave at different levels of output.

Although the total fixed costs of vehicle making are high in the short run, a firm with a standard (or average) level of output at near optimum scale is able to spread them thinly

(Table 4). One problem highlighted by Table 4 is how to treat labour costs. The economics textbooks traditionally regard labour as a variable factor of production in the short run.

However, in the 1970s and early 1980s, because of the impact of employment protection legislation, firms in the real world were loath to vary their workforces until long-run demand patterns became clear. Hence, as in Table 4, labour costs became regarded as ‘fixed’ in the modern motor industry. As the 1980s unfolded and as the necessity of improving efficiency to survive became more pressing, so the use of labour has become increasingly ‘variable’

16 once again. That is, the labour market is flexible. This attracts investment but also eases plant closures.

Table 4 Breakdown of average costs per car at standard output1 (%) Variable costs Direct production materials (ie, components and materials) 57

Warranty costs (ie, the repair costs of a car during its ‘guarantee’ period and borne by the manufacturer) 2

Variable overhead (eg, maintenance, marketing, etc) 7

Fixed costs Direct and indirect labour 10

Fixed overhead (including capital equipment, research and development, etc) 24

1002 1 This is based upon average capacity utilisation and is the volume of output on which fixed costs are allocated. 2 It is of interest to note that a vehicle firm itself is only responsible for about 45% of total costs. The remainder is 'bought in' from component makers, but also from utility suppliers (eg, electricity), transport firms and so on.

Source: Information from car manufacturers

As at least 66% of unit average costs of a car are variable, this illustrates why car firms are loath to engage in short-run price competition which involves cutting the price of existing car models. Even though car demand is price elastic (that is, a price cut generates a more than proportionate increase in sales to boost total revenue) it is unlikely that the increase in revenue would be enough to cover the increase in total production costs. So without reduced variable costs per car, or major production improvement, shifting the short-run (and hence the long-run) cost curve downwards, short run price cuts will reduce profits unless the cars are sold out of stock. Indeed, short run price cuts are often designed to clear stock.

17 Table 5: Optimum Scale in Various Car Making Activities Output per year (volume) Casting of engine block 1,000,000 Casting of various other parts 100,000-750,000 Power train (engine, transmission, etc), machining and assembly 600,000 Pressing of various panels 1-2,000,000 Paint shop 250,000 Final assembly 250,000 Source: Author's estimates

The actual manufacture of vehicles can be divided into a number of distinct operations each with its own optimum scale (Table 5). However, as well as technical economies, opportunities for lowering unit costs stem from optimising the sales network, advertising, finance, risk management and research and development (Table 6).

Table 6: Non-technical Economies of the Firm Optimum output per year (cars) Advertising 1,000,000 Sales 2,000,000 Risks 1,800,000 Finance 2,500,000 Research and development 5,000,000

Where technical economies of scale are concerned, and in terms of similar units, the most efficient car firm would, for instance, need to produce two million units using common body panels. In practice no such volumes per model are achieved anywhere, but firms try to approach the optimum by using as many common panels, especially the ‘platform’ under the car, as possible over a range of vehicles. (This illustrates the advantage in cost terms enjoyed by the Volkswagen Group at the present time.) Similarly, one type of engine is used over a variety of models. Another approach is for firms to collaborate and co-operate, so that different manufacturers use the same basic components. An example of this is Peugeot and

18 Fiat using the same body panels in their ranges of people carriers and vans. This turns an

‘internal’ into an ‘external’ economy of scale. Table 6 shows why so many different firms try to collaborate on marketing, and on research and development.

In the early 1990s it was argued by some that technological change would reduce the optimum size of car firms. However, so far this merely means that new flexible production equipment in assembly plants facilitates the manufacture of a wide range of models on the same assembly line. This reduces the model-specific, but not the overall, assembly optimum; indeed robots can actually increase the latter. In addition, new types of equipment, which can be used over a variety of models and over time, reduce the fixed cost per model. This reduces the numbers of a particular car that must be made to recoup tooling and development costs. Similarly, the use of computer aided design (CAD) might reduce the R&D costs per car. However, in all other areas of technical and non-technical activity the optimum has not yet been reduced by new technology. The most fruitful approach to reducing the optimum size lies elsewhere – a switch to what can be vertical disintegration through co-operation, collaboration and buying-out. The latter is often called out-sourcing. This covers a wide range of activities such as steering systems, seat manufacture, and the manufacture of front fascias.

Table 7 Output per Year Index of unit average costs (cars) 100,000 100 250,000 83 500,000 74 1,000,000 70 2,000,000 66

The gains from scale in car and truck manufacture are considerable and are as shown in

Tables 7 and 8. These indicate that optimality in the motor industry is given by the minimum

19 efficient scale (MES) on a near L-shaped long run average cost curve, rather than by a unique point on a U-shaped curve. That is, despite labour relations problems in some large firms, there are no overall diseconomies of scale in well run companies. In fact, Table 8 does not give a MES for truck production as the optimum is way beyond the present scale of truck manufacture. This explains the continual spate of mergers of this sector. This was not the case for cars, where a number of firms exceed 2 million units, and at which point cost reductions seemed limited. However, Table 6 shows that the research and development optimum is much greater than this. This explains the interest shown by all major car companies in joint ventures geared to cost sharing, and therefore cost savings, and in globalisation to expand the volume of production of a common set of components and range of vehicles. Therefore, the impact of volume on unit costs underpins the consolidation of the world car and truck industry into fewer hands.

Table 8 Output per Year Index of unit average costs (commercial vehicles) 1,000 150 10,000 132 25,000 120 50,000 110 100,000 100 200,000 85 Source: Author's estimates

Capacity

Given the importance of economies of scale on the one hand and short run cost structures on the other over-capacity can lead to considerable cost penalties and weak prices. Also, the increase in productive capacity will outpace the growth in demand. As a result over-capacity is likely as each manufacturer struggles to utilise all its capacity and tries to transfer the pain of adjustment to its rivals.

20 In a world motor industry where all products are regarded by customers as satisfactory ones product differentiation will be more difficult, and only firms with the right price-to-value ratio will prosper. In other words, and as said above, more than ever prices will be dictated by the market, and profits will only be possible if firms have competitive cost structures and avoid the cut-throat competition engendered by excess capacity.

Hence large and small firms alike in both the car and commercial vehicle sectors will be affected by the environment created by excess capacity. In particular there will be nowhere for the inefficient to hide as competition in the European industry reaches an intensity last seen at the end of the 1920s and the beginning of the 1930s. Faced with a wide array of excellent products customer loyalty will erode and it might be said that in future the consumer will not be merely sovereign but absolutely despotic. The degree of competition will intensify and the European customer may at last see the low prices that have long existed in the USA emerging in Europe. The greater price transparency caused by the Euro will be a major boost to this process. If all this was not enough the pressures imposed by environmental concern and internet trading will intensify.

So the European industry faces long run excess capacity, a large part of which is in Ford of

Europe. That is, even when the market is strong the ability to supply the market will outpace demand. This is even when capacity is measured on a basis of "standard" capacity and output which is about 85% of absolute two shift capacity. That is there is plenty of headroom to meet the "swings" caused by seasonality or the strong demand experienced by some manufacturers. In short the West European car industry can make 18 million cars on a two shift standard output basis. Actual output is around 15.5 million. If European industry responded quickly to that state of affairs plants would close, excess capacity disappear and

21 supply would be brought closer to demand at current prices. However, in Europe social and political constraints reduce flexibility, national rivalries impose beggar my neighbour attitudes, and companies are loath to accept the inevitable. In the end, capacity and supply will be reduced by a combination of joint ventures, plant closures and perhaps even mergers, and demand boosted by lower prices. The collapse of DAF Trucks in 1993 showed that although unlikely the liquidation of a major vehicle firm is not an impossibility.

As firms attempt to achieve the volumes needed to maximise economies of scale they grow in size. The threat of excess capacity and weak prices can threaten finances and put the viability of such enterprises in jeopardy. The collapse or sudden downsizing of these companies would cause major economic dislocation with significant political and social implications.

To avoid this countries may attempt to subsidise vehicle manufacturing operations within their territories. This means that there must be great vigilance to prevent the granting of subsidies getting out of hand, and moving from the legitimate to the intolerable.

Subsidy and the Automotive Sector: "Buddy Can You Spare a Dime?"

The motor industry because of its economic importance and significance to a country is often the recipient of state aid to cushion or offset the effect of market forces. This "state aid" covers not only financial subsidies but also regulations such as minimum local content issues, preferential treatment, favourable buying policies, quotas, tariffs and so on. In fact there is no hard and fast definition of state aid but you to try to recognise it when you see it.

Aid can cover various activities. In all instances the aim must be to offset a financial disadvantage but not to confer some operating advantage to the detriment of competitors and the correct operation of market forces.

22 So whereas state aid for regional purposes and perhaps R&D, and training and employment may be approved, that for modernisation is seen as a company issue unsuited to state aid.

Rescue and restructuring is only allowed if surplus capacity is removed.

Traditionally financial subsidy has involved direct ownership by the state as in the case of

Renault and British Leyland, rescues, and overcoming market failure to create a level playing field. In reality this has often meant the frustration of market forces to keep in being firms and companies that have failed in the market place. Aid that overcomes a failure of markets to operate properly involve regional aid, training innovation and R&D. However, because attempts have been made to distort competition under the guise of giving "legitimate" aid under the above, the European Commission has become much tougher in monitoring all aid giving. After all within a single market bereft of protection by tariffs or quotas, any uncontrolled state aid could cause chaos by giving some firms an unfair cost advantage. Now state aid can only be given if it does not distort competition. Even regional aid must be confined to economically viable projects and is limited to the precise cost disadvantages of investing in a particular locality – the "additionality" test. This is also intended to prevent countries being played off against each other by clever multinational companies. The

European Commission will be sceptical about the need for aid to companies like Nissan UK, which operates the most efficient plant in Western Europe in a "regional" location in the UK.

To qualify for subsidy projects must be mobile. If non-mobile then no aid is allowed. Non- mobile projects cover modernisation, rationalisation and replacement. However if complete model renewal and new production lines replace old a case for mobility, and therefore aid, can be made. This is seen as a plant or company "transformation" and may justify aid. The

23 Jaguar investment on Merseyside, where a Ford plant was transferred to Jaguar was a case in point.

Even then the impact of aid must be assessed. That is the effect on capacity and market share generated by the project. If the impact is large the award of aid even if justified by a regional disadvantage must be reduced.

Because the impact of aid in the motor industry can be so significant and because the industry itself is so significant and a large recipient of subsidy, it was the first sector to be given a

"framework" by the European Commission, within which aid can be given or rejected. So currently any project costing in excess of the equivalent of 50 million ECUs and needing state aid must be closely vetted by the Commission. This covers OEMs, and first-tier component suppliers of modules or sub-assemblies in the vicinity of the OEM's plant.

This may be the position in the European Union but the rest of the world is seeing a growth in subsidy. This is justified on infant industry and economic development grounds. The development agencies in many countries are only too eager to attract motor industry investment to aid economic growth and national prosperity, the UK included.

In a case where the industry is economically significant, global, highly competitive with structural over-capacity, the desire to offer an edge is strong. Hence the need to prevent subsidy and the consequent distortion of competition spiralling out of control. In the main the automotive sector welcomes the monitoring of subsidies, although the individual firms involved at any time are not so keen. State aid and subsidy should not frustrate market forces

24 but must help such forces. Hence state aid is not "good" or "bad" in itself – it must be judged in terms of aims and need.

Round-up of the Economics

The world vehicle market is growing whilst trade barriers are falling. Hence a global identity and market will become more of a reality in the next decade. This will intensify competition as markets fragment under the pressure from newly aggressive players and consumer choice reducing the market share of traditional leaders. New centres of production will continue to emerge, materials like aluminium, plastic and various composites will challenge the primacy of steel and iron in vehicle construction, and new fuels and systems of motive power will emerge globally although it is unlikely that the albeit increasingly efficient and cleaner internal combustion engine powered by oil based fuel will be seriously challenged in the next decade. The motor industry will remain as a major wealth creating in Europe and elsewhere activity operating under conditions increasingly determined by society's environmental concerns.

25 The Industry

26 The Modern Motor Industry: The Challenge of Change

Clearly, enough has been said here to indicate that the motor industry is indeed in the throes of one of its periods of rapid and profound change. Some manufacturers are coping with this better than others but all are facing a changing market. The motor industry still retains its place as one of the world’s largest manufacturing activities and will do so for many decades to come. In Western Europe the automotive industry covers a full array of functions involving the manufacture of parts and components, commercial vehicles of all sorts, and cars. This accounts for 10% of gross domestic product and 9% of manufacturing employment in the region. The products made by the industry claim the high ground in people’s perception. The interest in the car is manifested by the large number of specialist publications covering cars and motoring while others cater for the reader interested in trucks, vans and buses. When the normal useful life of a vehicle has passed it can often survive as re-cycled material and a few enter the realms of the vehicle preservation and conservation societies. The car is perhaps the finest access to personal mobility invented by man whilst the bus, truck and van are very cost effective means of carrying people and goods in bulk. So much so that their mass use is being questioned on environmental grounds. Therefore in one way or another, the use of these vehicles intrudes upon the lives of just about everybody in

Western Europe and increasingly the world. The particular UK contribution to the global automotive industry is centred on the manufacture and assembly of a vast array of vehicles, materials, parts and components, and the activities of design houses. Car production in the

UK continues to grow from the low point of the 1980s. In 1999 it was the fourth highest ever but commercial vehicle production fell to its lowest since 1948. In the next few years production of cars should at last break the 2 million a year barrier. Even so, particular entrepreneurial shortcomings in Europe has seen Ford reducing capacity involving the closure of the famous Dagenham assembly plant, whilst Rover's problems under BMW's

27 ownership is another reminder that in the competitive motor industry success cannot be taken for granted.

The economics of the motor industry has both a macro and micro economic dimension. In macro terms, the motor industry directly and indirectly accounts for a major part of the gross domestic product of a motor manufacturing country. In turn this means the industry has a profound impact on economic growth rates. After all, this is why in the ‘Stop-Go’ years in the 1950s and 1960s in the UK, the industry was singled out by government to be, in effect, an extra economic regulator in the economy. The industry, by providing products people want, generates hundreds of thousands of worth-while jobs, and is a source of large sums of capital investment. A new car for a multinational clientele costs the best part of £1 billion to develop and produce, whilst a major new factory such as an engine plant costs in total about

£750 million. The manufacturing and commercial activities of the industry creates trade flows and have major implications for the balance of payments. In dynamic terms the industry is near the forefront of new concepts and consequently is instrumental in introducing new production systems and techniques and the application of new materials. In short, it promotes technological change and requires considerable inputs of human capital. All this is important to the long term well-being of a country. Manufacturing activity is still important.

History tends to show that a country cannot live on service industry alone, but requires some balance in its economic structure.

In micro economic terms the industry is important especially as the manufacture and sale of vehicles generates so much up stream and down stream activity. The demand for cars largely depends on the size of people’s income and wealth, and on the prices the industry is able to profitably charge. There are other factors of course, such as population density. Commercial

28 vehicle demand is determined by industrial and commercial activity and the efficiency of the road transport industry in the medium term and transport policy in the long run. On the supply side the short run cost conditions depend upon the achievement of maximum production efficiency including excellent industrial relations and good management. In the long run only access to maximum economies of scale will allow firms to survive. In essence and despite the introduction of 'lean' techniques (ie, the minimisation of inputs and maximisation of outputs or 'economic efficiency') there is a bias to bigness. In the motor industry the prosperous manufacture of the future as in the past will be the lean mass producer. Lean production is not an alternative to mass production. In short it is a necessary condition for survival in a competitive market, but the sufficient condition requires lean production and high volume manufacture.

The motor industry may be an oligopoly but it is a highly rivalrous one. That is, it is not easy to establish that it is a cartel conducting activities which improves its position at the expense of the customer. The European and global motor industry is in a phase of ultra competition where more than ever it is the market rather than individual firms that determine price. This means that to survive in such conditions where product differentiation is being eroded and the ability to charge price premiums is limited, vehicle makers must have competitive cost structures. The nature and intensity of competition will punish those firms unable to achieve internal efficiency and maximum economies of scale. Small is not beautiful where vehicle manufacture is concerned. The processes of concentration on the one hand and globalisation on the other is testimony to this.

Vehicles are purchased because the buyers derive benefit from so doing. The car is a consumer durable that confers utility and a flow of services to those using them. Trucks,

29 vans and buses are bought because it makes commercial sense to do so. The efficiency of road haulage minimises transport costs and boosts trade. Despite some fanciful views to the contrary, nobody is forced to buy vehicles. The motor industry does not take people prisoner, with their release depending on them buying vehicles. People buy vehicles because, for some reason, they want to transfer themselves, other people or goods, from A to B. However, the growth in the level of vehicle usage is creating problems for society and is a challenge to the automotive sector.

The growth of congestion, the concern with vehicle noise, and the impact of exhaust gas emissions, are causing problems that require solution. In many ways road vehicle use must be seen within the context of a transport and communication policy. Congestion will justify some road building to alleviate the worst problems. Inter-urban and urban road policy to ration road space will occur, but telematics (that is electronic information and guidance systems) and electronics generally can be used to make better use of the existing road space.

The need to control emissions is already shaping legislation but whether the vehicle buyer will voluntarily turn to vehicles with alternative methods of motive power or different types of fuel will depend upon the economic attractiveness of doing so. We still await various technological breakthroughs, such as electric vehicles being as efficient as petrol or diesel ones. Perhaps it will take a system of taxes and subsidies to persuade consumers to do the

“right thing” for the environment. The motor industry is responding to the environmental concerns of society but it is seeking to do so at a speed their customers will accept. Already, the re-cycling of materials from vehicles that have finished their useful life is becoming increasingly economic, cleaner fuels have been accepted, and customers are more concerned about safety issues.

30 The industry must not lose touch with the interests of its customers. The customer tends to be conservative because a new vehicle will be re-sold into the used vehicle markets. The customer wants to be able to maximise the trade-in price. If revolutionary products are offered which the car buyer feels will not be attractive in the used car markets, the purchasers of new vehicles fearful of a capital loss will not buy them. The need for customers to resell vehicles imposes its own demands on the motor industry.

The UK car market is one of the largest in the world. Only the USA, Japan and Germany are significantly larger. Annual car sales exceed two million units as a commonplace. The growth of UK per capita income and the appearance of more competitively priced cars will drive the market to new record levels in the decade ahead. The car market in the UK will be vibrant but the challenges facing the manufacturers and retailers will intensify. On the other hand the rewards to success will be huge.

The benefits of vehicle manufacture and usage are still massively positive. Hence, more and more countries want to make vehicles and more and more people want to buy them. The motor industry in the developing countries will in future be the main centres of growth in both production and demand. However this does not mean that the motor industry in the traditional centres of production will not survive long term.

The industry makes products that people want to buy and use. The precise nature of that

‘want’ and the ability to use vehicles will be determined by ever changing consumer preferences. Increasingly that preference will be influenced by social considerations which may not coincide with the private wishes of individuals. This will determine the “demand” conditions in the market and which the industry will have to take as largely given. It is up to

31 the industry to meet those ever changing market conditions as any attempt to frustrate market trends will be regarded as unacceptable. The industry must get its supply conditions right in order for it to produce the products that people want at the right price and quality. Only if this is done will the industry in general and individual firms in particular survive. In the motor industry of the future even more so than in the past there will be little protection from competition and no prospect of survival for the inefficient. The transparency created by the single currency and the internet, the overcapacity, and the greater sophistication of the buyer will guarantee this. The challenge of the market is further reinforced by the changing and declining power of "brand" in the automotive sector.

Vehicle Branding: Or "Can we exploit the consumer?"

The "brand" has become one of the auto industry's buzz words. Conference organisers, market consultants, popular journalism amongst others, have climbed aboard the "brand" bandwagon hoping to benefit before journey's end, when all rush off in pursuit of a new fad.

If we are to believe the brand-exploiting industry every car and every manufacturer can enjoy benefits emanating from the brand. Is this so, and even if it is, is it to be applauded? After all, the attempt to unlock the value of the brand is often no more than consumer exploitation.

The whole purpose of strengthening a brand is to maintain or increase the future revenue streams that a powerful brand can supposedly deliver. In other words it increases the profits per car or truck for an auto company. What this really means is that increasing brand values is a way of introducing a market imperfection. It is an attempt by an auto maker to insulate itself from the full blast of competition where prices are mainly "made" by the market and not by an individual supplier. So if vehicle buyers learn that the auto makers were attempting to increase their brand values they should be concerned. This would not be done for their

32 benefit, no matter what arguments are used about stronger residual values in the used car market. The strengthening of front-end prices mean that the maximum value can be extracted from the consumer. However the truth is that the ability to "make" prices is being eroded, and firms are desperate to prevent the erosion of net revenue that the more competitive market is bringing.

Overcapacity, oversupply, the universal application of world best-practice in vehicle design and manufacture eroding product differentiation, reduces the market clearing price and undermines brand values. The emergence of price discounting and other sales incentives further chips away at this value. This is especially serious for marques whose success depends so much on maintaining used car prices. The market facing consumers is becoming more and more transparent, and armed with extra information they demand increased value- for-money. So, the increased interest in the brand and the appearance of so many people and organisations eager to tell the auto makers how to increase its value, is part of a desperate attempt to postpone the inevitable: in the world auto industry and especially in the mature markets, the power of free market forces is eroding that of the brand.

Attempts by the volume making marques to exploit their brands and the belief that every product has some extra value waiting to be exploited is put in perspective by the experience of the most powerful brands. The likes of BMW and Mercedes Benz cannot now charge the price premium against their rivals that they did ten years ago. In many instances the real value of the premium has halved. The volume makes and other specialists now make products more acceptable to the upper reaches of the market. Consequently to improve their survival prospects BMW and Mercedes are trying to put in place cost structures that will allow them to survive whatever the market throws at them. This is also the case with Ford's

33 Premier Automotive Group. The success of this is important for the UK where Jaguar's expansion plans are enormous as will be Land Rover's. In short, PAG production in the

Midlands and North West of England is replacing Ford car production in the UK. That is, survival will be based upon the economies of scale from consolidation and not on product differentiation.

A strong brand means heritage (derived from longevity of a marque), huge financial resources and product differentiation. Sometimes, two of these attributes can offset weakness in the third but not often. Hence, the Japanese and Korean makers, the mass producers, and small specialists will be disappointed in their attempts to strengthen brand values. Anyway to what is the brand attached? Often in Europe the consumer does not want to buy a "Ford",

"Volkswagen" or "Opel", but they do buy Fiestas, Golfs, and Astras. However, you do buy a

BMW or Mercedes. What do we make of General Motors which as a brand has no operational significance whatsoever: the "companies" are the likes of Chevrolet, Cadillac,

Opel, Holden, Vauxhall. What of Ford, which may be admitting defeat as an auto maker and now wants to be known as a Consumer Driven Corporation, and is re-defining and extending its core business. So what is the brand that is to be strengthened?

Happily, the consumer need not worry. The attempts to strengthen the brand, to increase revenue streams , and exploit the market seem doomed. The market is simply too competitive to allow any major success in strengthening prices against the buyer. If this was not enough, by the time the auto makers have decided what brand is to be supported – corporate, marque or model – the truth will have dawned. Markets determine price not brands. The brand if strong will allow you to survive in an increasingly competitive market

34 without having to cut price to unviable levels. That is all. Attempts to exploit a brand will be the road to overpricing, consumer resistance and ruin. Such is the challenge of change.

Global Economic Patterns

As well as coping with the challenges of the erosion of pricing power the global industry is facing changing horizons. At present the bulk of world car production is in Japan, North

America and Western Europe. In 1999 world car production reached a record level of just over 43 million. Of this 15 million was made in Western Europe, 10 million in North

America (plus 6 million “trucks”, used for 'domestic and leisure' purposes), and 8 million in

Japan. This left just over 10 million cars being made in the rest of the world. The biggest manufacturer outside the traditional areas of production was South Korea where 2.7 million cars were made in 1999, which was more than the total car production of 2.5 million in

Eastern Europe. However, even when the Asia-Pacific region was growing strongly before the economic crash of 1997-98, in countries like Malaysia, Singapore and Thailand total car production in 1996 was only 1.8 million. Even so this was equal to South America. Twenty years ago it was forecast that this part of the world economy would boom and that car production by the mid-1990s would be 7 or 8 million, with Brazil being a major global centre of output making over 2.5 million cars a year. This did not happen, and Brazilian car production and station wagon output remained under 850,000 units a year. This was a good example of why economic forecasts should be treated with caution. Now however the

Brazilian industry is stirring with output increasing to 1.6 million vehicles a year. However it will be some time before the Latin American market reaches the levels once predicted for it.

To a large extent the picture for car sales largely duplicates that for production, with 31 million car sales in 1999 out of a total world market of 43 million being made in the main producing countries. Of the remainder, 11 million cars were sold in Asia-Pacific, South

35 America and Eastern Europe. Given the underlying growth in the world economy the total car market is set to grow to 46 million cars made and sold in 2002. This will include some interesting developments reinforcing the industry's globalisation.

If the car market does reach the 46 million in 2002 that is expected, most production and sales will still be in the traditional centres of car production. In detail, the West European market could be about 16 million units, with that in North America reaching 12 million and

Japan growing marginally to just under 5 million. So 33 million sales out of a total world market of 46 million will be in today’s largest markets. In contrast sales in the rest of the world will be 13 million, or six million more than in 1997. In terms of production there may be a slight switch to new centres of manufacture. For instance, Western car makers will increase production in Eastern Europe by one million units, and Asia-Pacific production could more than double to 5.5 million. South America could grow to 2.5 millions, which is still a disappointing performance compared with what once was thought to be the potential of this area. However, it does seem that whilst the traditional areas will still dominate car production in 2002, there will be signs of a global shift of production. Furthermore, the companies that will engage in this globalisation will be the leading companies of today (see

Tables 1 and 2).

New Manufacturing Centres

Notwithstanding the economic crash of 1997-8 the most impressive increase in car production will be the Asia-Pacific region including China and Korea. The South Korean government has placed the expansion of the motor industry at the centre of its plans for economic development. Over the period 1997 to 2002 the production of cars will grow from

2.2 million to 3.5 million, with 2.5 million being exported. In addition more South Korean

36 car plants could be established in North America and Europe. This means that although links will be maintained with other global car firms, it is still South Korea that will develop the world’s next indigenous motor industry, perhaps based on one company Hyundai with others being foreign owned, assuming no political or military catastrophe in the area. In addition, commercial vehicle production will also expand to exploit the opportunities that rapid economic development in Asia will mean for truck use. At the same time car production in

China will grow to about 1.2 million by 2002. Most of these will be needed for internal consumption but a small surplus could exist for exports. Indeed Chinese expansion could be greater than this if the present circa 10% annual growth in national income continues, but expansion will also depend upon the establishment of a “motoring” infrastructure covering roads, service stations, selling points, financial institutions, insurance and so on. In short, the motor industry’s growth in China will both affect and be affected by the economy as a whole.

However such is the enormous size of China’s, and indeed India’s, population that the low average GDP per head figures hides the fact that there are many millions of people who could afford a car now.

In the period 2002 to 2020 the Asia-Pacific area will not only enjoy a high growth rate for car production and sales but it will also see a large total market appear. By 2020 car production alone could exceed 15 million units with a local market of 12 million.

The Competitive Challenge: Who Survives

It is likely that most of the car makers will either be, or linked to, the dominant global players, that have pulled far ahead of their rivals (Tables One, Two and Three). The dominant firms will be Ford, General Motors, Volkswagen, Toyota and the giant global specialist Daimler-Chrysler. As Renault and Peugeot had been confined largely to Europe it

37 was not easy to see them becoming true global players on their own and this would have made their survival as independent entities that much more difficult. However, Renault's alliance with Nissan has changed their position dramatically as they try to join the ranks of the dominant. As yet this is by no means certain. Fiat, likewise is trying to escape from its

European confines and may have done so with its alliance with GM. Volkswagen despite its size will only become global if it is able to successfully transform its productivity and increases production outside Europe either by its own efforts or through an alliance with an

Asian or US firm. Companies like Mitsubishi found it difficult to retain their independence as global competition increases. In their case survival will depend on them being wedded to

Daimler Chrysler and as their contender in that 80% of the world market that the US based

Chrysler and up-market producer Mercedes Benz did not penetrate. The decision by Isuzu to stop car making and Nissan's falling market share in Japan and the USA in the 1990s and their link with Renault in 1999, shows that the Japanese are not immune from the laws of economics where large size helps survival. Subaru's and Suzuki's links with General Motors reinforces this. Ford's purchase of Volvo Cars is merely another example of this. As indicated, lean production, which is the attempt to minimise inputs and maximising outputs, is a necessary condition for survival but not a sufficient one. The survivors will be the lean mass producers. The global merger between Daimler and Chrysler in 1998 and the "de facto" takeover of Mitsubishi in 2000 means that the survival of Daimler as a vehicle maker will be linked to both commercial vehicles and a variety of cars. As indicated they needed

Mitsubishi to tap into the huge market for smaller and cheaper cars. The history of the motor industry shows that small is not beautiful. In terms of the car industry Daimler was small, and suffered the cost penalties that this produced. To avoid this it has made itself large via the Chrysler and Mitsubishi take-overs and can make itself truly efficient at any given scale.

Furthermore, new technology and improved quality always sees the larger firms gradually

38 invading the territory of small firms. As a result, and decade-by-decade, the smaller firms have fallen by the wayside. This is so not just for cars but also for trucks. The attempt to avoid this fate was also at the heart of BMW's motive to buy Rover. The failure of this alliance, albeit with BMW retaining Mini puts a question mark against BMW's ability to remain independent. The consolidation process of the 1990s has changed the structure of the world car and truck industries out of all recognition. As already indicated, the result is the reassertion of the primacy of US firms, and the possibility of Ford regaining the top spot for the first time since 1931. The growth of the GM alliance has been matched by Ford's absorption of Volvo, Land Rover and Daewoo.

The European and British component industry employees 50% of those in the motor industry.

Overall, its relative efficiency is inferior to the vehicle firms. If the component sector does not respond to the competitive challenge it will lose business and be drastically reduced in size as European vehicles use “foreign” suppliers. In the UK the physical productivity of a number of vehicle firms such as the Japanese leads, and Jaguar, GM and Peugeot matches, that in the rest of Europe. However, the UK like the European component sector outside the top firms still contains too many inefficient operations.

Trucks

The world market for trucks and the division of world production, is different to that for cars.

Whereas most of the world market for cars is in North America, Western Europe and Japan, only just over 50% of the heavy truck market is in these areas. This reflects the role of the truck as a capital good which has major markets not just in the world’s affluent areas. As a result some of the world’s largest truck markets will be in Russia, India, China and Latin

America. Already the Indian company Telco, which is linked to Mercedes, is in the world’s

39 top-ten of truck makers. Brazil is the world’s largest bus market with the others being India,

Russia and China. At present if Western Europe has a comparative advantage in the motor industry it is not in car or component making, but in the heavy truck industry. Here,

Mercedes, Volvo-Renault and Scania-VW have a true multinational position, and together with Iveco have a major grip of the world’s heavy truck and bus market. This position will continue for the foreseeable future, although even here some new alliances and mergers are likely (see the impact of economies of scale above). After all the failure in 2000 of Volvo and Scania to merge only highlights the fact that mergers are still needed in the European car and commercial vehicle industry. A future alliance may see Iveco taking control of MAN and Navistar.

Although the European truck firms together with Paccar and Navistar of the USA and Isuzu,

Hino, Mitsubishi and Nissan Diesel of Japan have been the traditional major players in the world market during the last twenty years, such is the market potential that Russia, China and

India could develop their own producers in this industry. A combination of Western 'know- how', international finance and local markets could see new truck makers entering the industry, and well able to challenge Western producers in the developing markets of the world. Much of the world needs robust, reliable, trucks and not complex vehicles full of electronic devices. The world truck, and bus, market offers new entrants a clear commercial opportunity.

Conclusion

Wherever one looks, in the motor industry and vehicle market, changes are legion. The world vehicle market is growing whilst trade barriers are falling. Hence a global identity and market will become more of a reality in the next decade. This will intensify competition as

40 markets fragment under the pressure from aggressive competitors and consumer choice reducing the market share of traditional leaders. Although traditional areas of vehicle making will remain competitive, new centres of production will continue to emerge, materials like aluminium, plastic and various composites will challenge the primacy of steel and iron in vehicle construction, and new fuels and systems of motive power will emerge globally although it is unlikely that the albeit increasingly efficient and cleaner internal combustion engine powered by oil based fuel will be seriously challenged in the next decade. The temptation to consolidate will remain as firms seek the comfort of size. The motor industry will remain as a major wealth creating activity operating under conditions increasingly determined by society's environmental concerns, and with prices more and more set by an increasingly competitive market. The efficient firms within the automotive sector will share in this, but in such a world there will be no place for the inefficient. The automotive market of the twenty first century will be a hard task master for manufacturer, importer and retailer alike. Examples of this are the new realities facing the Japanese motor industry and the risk taken by Renault by allying with the troubled Nissan and Samsung to try to secure their long term future by joining the ranks of the truly global players.

In the early 1980s the UK motor industry was being written off as a major force.

By whatever criterion used, be it output, employment, investment or its contribution to the balance of payments, the industry was in decline and but a pale shadow of its former status. For example, car production in 1982 was

868,000 compared with 1,921,000 in 1972, while an industry that could be relied on to earn a balance of payments surplus slipped into a deficit of almost £1bn in

1982. By 1989, the deficit had worsened to £6.5bn.

41 Now the position is changing as a major recovery occurs in the industry. This is in no small part due to the huge investment being made in the UK by Japanese vehicle motor companies, but also to the improvement in the affairs of the traditional car manufacturers. However, one can no longer talk about a British motor industry, but rather a motor industry in Britain.

The UK is the first major vehicle manufacturing country to relinquish domestic control of its motor industry. Unlike in 1972, the ownership and control of large and small car companies and commercial vehicle makers is now largely located abroad, a process still continuing in

2000. Companies such as Morgan or TVR cars are among the few small-scale exceptions that prove this rule.

This change is due to traditional companies such as Land Rover and Jaguar being bought by larger companies, and Japanese investment reinforced this. As a result, the motor industry in the UK has become truly part of a global industry.

In future, this could be a source of strength that not all other European motor industries may share.

So, the rise and decline of the UK-owned motor industry is being replaced by the emergence of a motor industry in the UK, stronger and more efficient than anything that went before. Although it is sad that the UK has lost most of its domestically owned motor industry, nevertheless it is returning to the forefront of the European motor industry. If this can be consolidated, then the UK will re- emerge as a major force in the world industry.

42 The magnitude of the improvement is already considerable. Exports recovered from 186,000 cars in 1984 to almost 620,000 in 1994. By 1998, exports exceeded

1m units for the first time and could reach 1.2 m in 2001.

Exports are driving the recovery in UK car production. In 1982, UK car factories struggled to make 868,000 cars, a level of output that reflected the disaster facing the UK industry. In 1998, output was the best since 1972 (see Table 9), and grew again in 1999. However, in 2000 the difficulties at Rover and Ford may see output fall for the first time since 1991.

Table 9: UK Car Market Statistics, 1996, 1998 and 2001 (m) 1996 1998 1999 2001

Registrations 2.00 2.2 2.20 2.3 Imports 1.25 1.5 1.57 1.6 Exports 0.9 1.0 1.14 1.2 Production 1.7 1.75 1.78 1.9 Capacity 2.2 2.20 2.2 2.3 Source: Derived from SMMT Yearbook, various years; CAIR

Much was achieved in 1998. Exports exceed 1m cars a year for the first time.

Imports were a record. The car market was the second largest on record.

Production was the best since 1972. Capacity utilisation improved. The UK industry was doing well, but in the way of competitive markets, some companies or plants did less well or downright badly. This was the position facing the

BMW subsidiary, Rover, in 1998-2000, and Ford’s Dagenham plant. A crisis within an overall industrial recovery.

43 The cold figures in Table 10 reflect exciting developments in the UK motor industry. The three Japanese car companies – Nissan, Toyota and Honda – are in the midst of continuing investment which will have injected more than £3.5bn of capital investment in the UK between 1984-2001. However, this is put in context by Ford's £1.9 billion investment programme for 2000-5.

By the end of the decade, the Japanese factories in the UK will be spending

£2.8bn on buying supplies in Europe – hopefully more than 65% of this will be in the UK but the value of sterling may provoke a reappraisal. These purchases will be used in manufacturing 900,000 cars (Table 10). (The figure can go beyond this as Toyota may have capacity to make 400,000 cars, and three-shift working at Nissan would allow the production of 500,000 cars.) This suggests that some criticism of the underlying performance of the UK component sector is overdone.

Table 10: Japanese Vehicle Production in the UK (000s) 1994 1998 2001 (forecast)

Nissan 215 289 350 Toyota 43 172 250 Honda 89 112 200 Total 347 573 800 Source: Derived from SMMT Yearbook, various years; CAIR

The Japanese manufacturers say that many UK suppliers are up to the mark, with quality standards approaching those in Japan. As a result, by 2001 the

Japanese owned and linked manufacturing plants will employ 12,500 people, together with another 16,500 in UK component plants, and 4,500 in other

44 European factories. Another 16,000 jobs will be created in the European economy generally, giving 50,000 in all. Most will be in the UK. However, even here matters do not stand still.

The effective purchase of Nissan by Renault means that the future development of Nissan’s UK operation will depend on how it fits in with the Renault-Nissan global strategy, and the continuing appeal of a UK production base. (Similarly for ERF within MAN, and if the latter is bought by Iveco which already has a UK subsidiary in Seddon Atkinson further changes will occur.)

The hoped-for effect of Japanese car companies on UK vehicle suppliers shows that the recovery of British car production cannot just be measured in terms of the numbers of cars made and sold at home and abroad, but is also a matter of the British content by value of those vehicles.

In 1972 when the record UK car production was achieved, the local content of those vehicles was almost 100%, by value. Now the situation is different and demonstrates the international nature of car production.

In the UK the British content of a Ford or Rover normally exceeds 70% whilst that of Peugeot and Vauxhall is around 60%. The Japanese makers responded to

British requests with a gentleman’s agreement to aim for at 80% "local" (ie, EU) content, but with an understanding that the UK value would be around 70% of the ex-works costs.

45 The impact of the exchange rate on the competitiveness of a car firm is influenced by the local content. So firms may try to counter the "overvaluation" of a currency by reducing the domestic content and buy components abroad to benefit from the exchange rate. To this extent Peugeot and Vauxhall have a considerable built-in hedge against a high pound. However it would be ironic if at the very time that Japanese car manufacture was building up to levels that really benefited UK suppliers, the UK content was cut to compensate for the exchange rate effect on profitability.

In the main investment in the motor industry is affected by long term issues and not short term exchange rate movements. However, if the pound’s long term appreciation since 1996 was forecast as lasting as long again, then this could affect not only company’s sourcing strategy but also investment in plant and products: cars, commercial vehicles and tractors. The fact that the Japanese car makers with amongst the most productive plants in Europe are making losses demonstrates that the problem is not one that can be easily dismissed as the result of low productivity, poor quality and defective products. However it is true that the cars made in these British plants are not as competitive as anticipated with the usual implications for pricing. What can be achieved in the UK without adverse exchange rates and weak products is demonstrated by Jaguar with growing sales to markets like the USA where the currency has kept in step with sterling.

46 Before the major appreciation of sterling in 1997, the efficiency of car plants in unit cost terms was often the best or equal to anything else in Europe.

Therefore, GM expanded its UK car manufacturing facilities at the end of the

1990s for the first time since the 1960s, and prepared to introduce new and extra car models. Net of the exchange rate effect, Ford’s UK cost base was among the best in Europe. However, notwithstanding the exchange rate many firms are finding the UK to be a good base. This was confirmed by Vauxhall when announcing in 2000 its £189 million investment in UK manufacturing resources.

This is a measure of the impact and role of the UK motor industry.

Rover's potential capacity was impressive. Before its dismemberment in 2000, the company could make a 600,000 cars and 200,000 Land Rovers a year with minimal investment to take out bottlenecks. This was appreciated by BMW, which needed Rover's volume to secure its own future in a motor industry inhabited by corporate giants. Now, however, Land Rover's 250,000 units have been bought by Ford, BMW will retain 250,000 units of capacity at Cowley and hopefully Rover at Longbridge will find the ways and means to unlock its

350,000 units plus of capacity.

At the top end of the market, Jaguar has rationalised its Coventry factory to enable it to make 50,000 units a year with ease and has built a new assembly plant capable of making 120,000 cars a year. From 2002, it will run Halewood to make 150,000 compact Jaguars.

47 In this way, Ford will be confident that its Jaguar subsidiary can achieve sufficient economies of scale to obtain a competitive cost structure. In addition,

VW will take Bentley’s capacity up to 8,000 a year – adding to the contribution of

'Others' to the recovery of UK car manufacturing. Rolls Royce will site a new plant on the south coast to assemble 1,000 Rolls Royce cars a year.

Also in Coventry, Peugeot is increasing capacity from 120,000 to 180,000 units a year with extra models, new investment in equipment, more flexible work practices and extra shifts. This restores the position to what it was before the state rescue of Chrysler in 1976. (All summarised in Table 11.)

Table 11: Other UK Production of Passenger Cars (000s) 1994 1998 2001 2003 (potential) BMW (Mini) - - 100 200 Rover 480 466 200 250 Jaguar/Land 303 349 500 450 Rover/Ford* Vauxhall 245 277 300 350 Peugeot 75 71 140 180 Others 6 12 10 20 Total 1,109 1,175 1,250 1,450 * Land Rover figures in Jaguar/Land Rover/Ford total in 2001 and 2003. No Ford output in 2003.

Source: CAIR

So, the position of the UK in the global motor industry is a significant one. As a case in point, by 2005 the car industry will have the capability to make between

2.6m and 2.7m cars and light vans. It is likely that output will develop to a level that will use most of this.

48 Unfortunately, it is difficult to see a similar revival of heavy truck making as so much capacity has closed in the past decade. However, the emergence of Paccar as a major force in the UK could create good possibilities, and Seddon-Atkinson has a strong niche within the Fiat Iveco empire. In addition, Dennis has become a real force in the bus industry.

The ’Other’ category hides the small company sector, which remains a vibrant part of the UK motor industry. While the likes of Aston Martin, Lotus, Bentley and Rolls-Royce are part of large combines, stand-alone enterprises are still able to survive, and some flourish. There will always be a UK-owned sector of the motor industry as long as companies like Morgan, TVR, Caterham, Bristol and others are able to make a profit and finance new products. This entrepreneurial part of the industry attracts changes of ownership, new entrants and liquidation.

The ’creative destruction’ within the sector ensures the survival of the fittest and a continuing role for the UK-owned car manufacturer in an industry dominated by corporate giants. This output from individualism and old-fashioned entrepreneurship is at the heart of the UK’s major position in the motor racing industry, and in vehicle design and development. Even where no UK companies are involved, UK-trained individuals are. It is no exaggeration to say that whereas in the 19 th century the Scottish engineer was to be found everywhere, now it is the UK-trained designer and stylist that holds a key position throughout the world motor industry.

49 Summary

In the early 1980s, it appeared as if nothing could stop the process of decline in the UK motor industry. Through inward investment by new entrants and improved performance by the existing suppliers, decline has been turned into growth.

The motor industry in the UK is re-establishing itself as a major force in the car market. It is up to the UK component sector to show that it can benefit from this, and despite the plethora of adverse comments in sundry reports, many UK component companies are showing that they can. The main short term challenge they face is the possibility of UK based car makers switching suppliers abroad as an exchange rate hedge.

As the economic effects of the motor industry are so large, the 315,000 people in the UK directly and indirectly employed by this sector of manufacturing, a motor industry is a useful thing to have. One thing is sure. Given the dynamic nature of the global motor industry, of which the UK is very much a part, there is never a ’final form’ for the industry in the UK. Change is always on the agenda.

Therefore the industry is a force for change in the British economy.

In addition, governments do well by taxing vehicle purchase and usage and in the UK’s case government policy can take some credit for attracting major inward investment in the motor sector in the past decade.

50 This success needs to be repeated in other parts of the economy if the revival of UK manufacturing is to be meaningful, and ancillary service jobs created. The nature of the motor sector's performance is impressive.

The economic impact and significance of the automotive manufacturing industry in the UK, vehicles, parts and components is considerable. This is measured in terms of the employment, trade, investment and wealth creation of the industry on the one hand and the impact on qualitative factors such as skills and technology on the other.

During the 1980s and 1990s the industry has experienced major restructuring. In the 1980s the trend of activity and employment was downwards with the reduction being over 50% in each case. In the 1990s there was a substantial recovery in car output and a small recovery in employment. The former almost doubled but the latter increased by 25%. In all productivity increased by almost 300%.

The industry is now much more efficient and can be described as a major element in the

European motor industry where cars and many components are concerned. Even in the case of commercial vehicles where no recovery in output has occurred there are significant players contributing to the economic significance of the UK.

The industry contributes massively to the UK's export drive and import saving despite an overall trade deficit. Without the contribution of the UK based automotive sector, and everything else being equal, the automotive trade deficit would be eight times worse than it is.

51 The impact of the industry stems not only from the major component and vehicle firms but also from an array of specialist makers where the UK is a world leader. This is especially so in the high performance car sector and in support facilities and research and development in the independent design houses and contract engineers. The latter employs 5,000 people using the most sophisticated technology. They turn over in excess of £600m and export 80% of their output.

The improved performance of the industry is manifested in a number of ways such as reduced costs, increased productivity and are driven by the industry's widespread realisation of the need to improve itself. In addition this has created a remarkable series of partnerships within the industry and with outside agencies including government. This introduces world class performance to the UK economy as a whole.

52 Assessment

The UK automotive sector is no longer synonymous with all that is bad in the UK economy but on the contrary it is the benchmark for all that is good. The re-emergence of the UK as a competitive manufacturing and service economy had its beginnings in the automotive sector, and it is that sector that continues to drive the process forward. However, as is the way of competitive markets, not all firms automatically share the "good news". This has been demonstrated by the tribulations of Rover and Ford.

The UK motor industry through its production activities and the products it makes is a major force in the economy that not only increases national prosperity but also improves the quality of life for so many. Whatever the "costs" of vehicle manufacturer and usage the "benefits" greatly exceeds them. The industry has a well advanced philosophy of social and community responsibility. Its enduring success is based upon this and its ability to give customers and society what they want at the right price and quality. The impact of the automotive industry is what it is: being in all respects a value-for-money industry.

British Car Prices: A Case to Answer

Although the supply side of the UK industry is showing signs of real recovery, the reduced costs of operation will be needed if UK car prices are really re-aligned to meet the levels in comparable countries in the European Union, and the intensified price competition of the future. The pricing issue and vehicle and component making in the UK are inexorably linked.

Concern over the level of British car prices has waxed and waned since 1979, but there has been nothing like the present controversy. New car prices are caught up in the general belief

53 that British consumers pay too much for many goods and services in what is termed 'rip off'

Britain. This has increased consumer awareness and discontent, which means that the context within which the present Competition Commission enquiry is taking place is very different to that of the Monopolies Commission in 1992. Consequently the impending report will be much more critical and prescriptive. Therefore, the enquiry is looking at all aspects of the car market to see whether the degree of competition can be increased, with consequent effects on prices.

This is the way the Monopolies Commission and new Competition Commission tends to work. Only rarely, and on five occasions since 1970, does the Commission make a direct order on prices. Normally, it is the conditions in the market that is altered. However, the UK car buyer has been led to believe that the Competition Commission will make an order to reduce car price, perhaps by over 10%. This has led to people postponing car purchases until prices fall. In short, there is a bear market in cars which may force the very price reduction the customers were expecting. If so this will mean the destruction of the car industry's long held position that higher pre-tax prices (and thereby post tax compared with countries with similar tax levels) are not their fault.

The basis of the industry's argument is that it is exchange rate volatility and differential levels of car tax that causes an apparent difference in car prices. True, three years ago UK car prices were not out of line, but a subsequent 25% appreciation of sterling when, sterling prices of cars remained unchanged, caused the car price differential. However this was three years ago, and sterling will remain strong for a long time yet. So the issue is not what caused the differential but why has it persisted so long. The reason is lack of sufficient arbitrage. In turn this is because the Block Exemption to protect the Selective and Exclusive Distribution

54 (SED) system prevents large scale commercial parallel importing. Similarly with the tax issue. In the USA differences in pre-tax prices for cars between states is not possible even when taxes are different as they are arbitraged into uniformity. It is quite legitimate for the

Competition Commission to examine such "European" issues as this will provide advice to the governments as to whether or not it should support a continuation of block exemption.

Given that the Commission wants to increase market forces and make matters more transparent it is entirely legitimate for them to question whether freeing-up the provision of dealer credit would reduce its cost, whilst questioning the prevalence of pre-registrations says that reducing new car list prices would be a better deal for all buyers as suppliers seek to clear the market. Volume discounts to dealers, allied to the smaller dealers buying co-operatively would increase their freedom of action whilst limiting the extra impetus to dealer consolidation. The possibility of abolishing recommended prices stems from a concern that too high a list price will result in the discounted price being excessive. Of course there are some who question the need for lower list prices on the grounds that all the gain will be lost by a fall in used car prices. (There have been claims to this effect.) This is a nonsense.

Why?

If new car list prices fall by 15%, a fall in used car prices by the same percentage, will reduce the cost of change by 15%. If all vintages of used car prices fall by the same amount and given the size of this market, those people on more modest incomes will experience a subsequent increase in real purchasing power. However, large fleets are worried by the balance sheet implications of a fall in residual values. Furthermore, fleets that have bought at a substantial discount have sold cars at used values determined by UK list prices. The

"concern" over new car prices is more like a fleet-inspired vested interest. (Similar

55 arguments were expressed when it was proposed to abolish the Special Car Tax of 10%.) To maintain list prices to protect fleet economics would not be acceptable to society at large.

The car price issue is not confined to the UK as is shown by car firms responsible for 58% of the West European car market being singled out for investigation on competition grounds by the European authorities. However, whatever the events of the exchange rate and car tax

"defence" for higher prices, there are grounds for saying that as in any other industry the car suppliers should now be reacting to the long term appreciation of sterling. If price flexibility is being frustrated by market power then the industry will do nothing for its image by trying to defend the indefensible. This is equally true for new and used car prices. The results will be greater arbitrage in the EU and a freer market which will equalise at a lower market clearing price. This will be a major challenge to vehicle making in the UK. Clearly, if a vehicle maker increases its foreign content either by buying more components abroad or by making more cars outside the UK, a high pound is less of an issue. A run down of Dagenham frees Ford from its UK cost base where the assembly of Ford cars is concerned. In future this could make it a very aggressive price-cutters to the concern of the General Motors plants in the UK.

56 The Economic Impact

57 Industry's Impact: The "Averaged" Position

The overall impact of the UK motor industry gives the average relationship between output and employment. In considering a change in output and its employment effect the need is to measure the marginal change. This can be very different to the average and it is the

"marginal" calculation that is of interest in estimating the impact of Ford's Dagenham rundown. Initially however, the average position is presented in detail to give a feel for the situation, and a guide to the relationship between output and employment.

During the 1980s and 1990s the industry has experienced major restructuring and 2000 shows no sign of let up. In the 1980s the trend of activity and employment was downwards with the reduction being over 50% in each case. In the 1990s there was a substantial recovery in car output and a small recovery in employment. The former almost doubled but the latter increased by 25%. In all productivity increased by almost 300%, with employment down by almost 50% and output doubling.

The industry is now much more efficient and can be described as a major element in the

European motor industry where cars and many components are concerned. Even in the case of commercial vehicles where no recovery in output has occurred there are significant players contributing to the economic significance of the UK.

The industry contributes massively to the UK's export drive and import saving despite an overall trade deficit. Without the contribution of the UK based automotive sector, and everything else being equal, the automotive trade deficit would be eight times worse than it is.

58 The impact of the industry stems not only from the major component and vehicle firms but also from an array of specialist makers where the UK is a world leader. This is especially so in the high performance car sector and in support facilities and research and development in the independent design houses and contract engineers. The latter employs 5,000 people using the most sophisticated technology. They turn over in excess of £600m and export 80% of their output.

The improved performance of the industry is manifested in a number of ways such as reduced costs, increased productivity and are driven by the industry's widespread realisation of the need to improve itself. In addition this has created a remarkable series of partnerships within the industry and with outside agencies including government. This introduces world class performance to the UK economy as a whole.

The industry has favourably altered fundamental elements in the field of new technology, organisation, training and skills, industrial relations and employee involvement.

Despite the problems of the 1980s the automotive sector is still a major force in the economy, which allows it to create or support jobs and income elsewhere:-

(i) In 2000 some 105,000 people were employed in vehicle manufacture and 140,000 in

component and parts manufacture. Another 30,000 were employed in a wider

definition of both activities. This represented 1.5% of the UK's total employed labour

force and 8% of all manufacturing jobs.

The traumas at Longbridge and Dagenham and the knock-on effects will reduce the

total by around 13,000 although employment will increase first at Honda and

59 eventually at Bentley, Rolls Royce and Cowley. The net impact of all this is a job

loss of 11,000.

(ii) The industry generated a turnover of £30bn directly plus £10bn indirectly.

(iii) The automotive sector contributed some £30.0bn to GDP, or 4.1% of the total. That

is, the industry is a major contributor to national income.

(iv) The investment by the industry on products and facilities exceeds £2.5bn per year.

The industry in the 1990s has been in the midst of its largest post-war investment

boom. In plant renewal and expansion alone this amounts to over £7.5bn. The

investment in the regions has been important. The employment impact on the West

Midlands, South East, Wales, North West and North East is central to the economic

wellbeing of those areas. The industry has played a major role in regenerating the old

industrial areas of the UK.

(v) The total number of jobs in the automotive sector of 275,000 is enhanced by the

40,000 employed in backward linkages into sectors such as steel. The job total of

558,000 in forward linkages into vehicle retail are not included, as most of these jobs

would exist whether or not there was a UK based automotive sector. Even so they are

part of the effect of vehicle manufacture and use on the economy and their role must

be remembered. The official measure of the motor industry is an underestimate by at

least 30,000 jobs. The report, and the figures above correct for this. It also reinstates

jobs defined away by changes in the official basis of the headcount in the industry.

60 These 315,000 jobs in the automotive sector creates jobs throughout the UK economy via the multiplier effect. This is conservatively estimated as 50,000 but could be as high as 330,000.

The total job dependence on the UK automotive sector throughout the UK economy is

365,000 or 1.6% of the UK's employed workforce (Table 14). That is for every one person employed in vehicle making alone, an additional 4 people in the UK owed their jobs to the activities of these car and CV firms and ultimately to the demand for British-made vehicles.

The impact of the industry depends in the final analysis on the competitiveness of the industry: the ability to produce products acceptable to the customer in efficient and profitable operations.

If "other" vehicle manufacture (such as tractors) is added, and assuming no extra employment in the component sector, the backward linkage and multiplier total would increase and there would be some forward linkage into products like tractor cabs. This would increase the total job impact of the UK automotive sector to about 385,000. If a one-for-one multiplier was used then the total would be 650,000 (ie 2 x 325,000 from direct employment, backward linkages and employment in "other" vehicle making). If the forward linkages were also added then a figure of 1,258,000 emerges. This may not be the impact of the UK automotive sector, but it gives the job importance of the industry within the UK. It amounts to over 5% of all UK jobs.

The job and wealth impact of 365,000 identified (Table 14) is the impact of the automotive sector. That is, the impact of vehicle and components and parts production. It is not the impact of the vehicle firms alone. This allows us to include the export and after-market business of the parts, materials and components suppliers.

61 The automotive sector has had a qualitative effect on the UK economy. The productivity improvements alone have set the standards for the rest of the engineering sector.

The qualitative impact has come about as a result of the restructuring of capacity and the introduction of new technologies leading to new models and products. The changes have involved: increased labour utilisation through workforce improvements; better organisation leading to improved working within and between companies. In turn this has produced improvements in human capital and greatly improved industrial relations and human resource management.

The UK automotive sector is no longer synonymous with all that is bad in the UK economy but on the contrary it is the benchmark for all that is good. The re-emergence of the UK as a competitive manufacturing and service economy had its beginnings in the automotive sector, and it is that sector that continues to drive the process forward.

The UK motor industry through its production activities and the products it makes is a major force in the economy that not only increases national prosperity but also improves the quality of life for so many. Whatever the "costs" of vehicle manufacturer and usage the "benefits" greatly exceeds them. The industry has a well advanced philosophy of social and community responsibility. Its enduring success is based upon this and its ability to give customers and society what they want at the right price and quality. The impact of the automotive industry is what it is: being in all respects a value-for-money industry.

62 The Economic Significance of the Motor Industry: An Overview of the

Past

Despite its decline as a world force in the 1980s the UK motor industry is still a major part of the economy. Indeed, in 1987 the motor industry as defined by the

Standard Industrial Classification (Class 35) accounted for about 1.5 percent of total employment. The purpose of this study is to show its continuing impact.

However, the inclusion of employment in raw materials, component supplies in other industries directly dependent on the motor industry, and other jobs created throughout the economy more than doubled this to 3.4 percent. Indeed, a study at the time (PEIDA, 1984) put employment in the motor and associated industries at over 600,000 people, with knock-on effects creating another 400,000 jobs. About 5 percent of gross domestic product (GDP), 11 percent of manufactured exports and 7 percent of visible exports were accounted for by the motor industry. In 1985 the motor industry earned £5,046 million overseas despite an adverse balance of £2,758 million. The dynamic effect of the industry was shown by the fact that during the major growth period in 1954-63 about 27 percent of the 'above-trend' growth of the economy was due to the growth of the motor industry. The last ten years has seen another major growth record. The economic importance of the industry was always fully understood by the

Japanese, West German and French authorities who used their motor industries as the main engines of economic growth and who, unlike their UK counterparts, avoided using them as short-term weapons of demand management in case their growth potential, and hence their efforts on the economy overall, were harmed.

Consequently, these authorities tried to maintain a steady growth of vehicle

63 production. In the UK, however, the picture was, as is well known, very different.

The Job and Wealth Impact

The Invest in Britain Bureau (IBB), together with many of the inward investment agencies, report their performance in terms of the value of investment, together with jobs newly created or existing jobs saved. However, it is important to realise that these figures are based on the estimates of the company concerned at the time of announcement rather than ’outcome’ figures once the investment is in place.

Table 12: UK Inward Investment – Projects and Associated Jobs Created or Saved, 1996 Country Number of Projects Total Jobs

US 323 65,297 Japan 58 6425 Germany 56 9825 France 29 9825 Canada 21 5118 Netherlands 19 4871 Switzerland 17 5893 Taiwan 10 2909 Denmark 8 827 Others 66 12648 Total 618 124622 Source: UN

Table 12 shows that the US is clearly the major source of FDI for the UK. Table

12 is based on data prepared by the United Nations Conference on Trade and

Development and applies to 1996. In that year, the UK was the second most popular FDI location in the world (after the US). Moreover, the UK was the

64 leading FDI location in Europe in 1996, accounting for 28% of all projects and

£22.2bn of investment. Indeed, in 1997 FDI into Germany and France actually fell – thus questioning predictions that the UK would lose out because of its exclusion from the first round of European Monetary Union, as does the record level of FDI in 1999.

The IBB does not give a sector breakdown of FDI projects, but the automotive industry certainly features very strongly – the IBB produces a special brochure on the automotive industry in the UK. There were 58 major automotive component project start-ups in the 1997-98 financial year, according to the IBB, more than the electronics and pharmaceutical industries combined. There were

618 projects in total in 1997-98, so the automotive industry represents about

9.3% of total FDI to the UK. Interesting as this is, the job and wealth impact goes well beyond this.

The Job and Wealth Impact in Detail

In 1998 and before the turmoil caused by BMW selling Rover and Ford's gradual run-down of vehicle assembly at Dagenham and the pressures of a high pound, the official figure for employment in the motor industry was 227,000 as shown in

Standard Industrial Classification 34. In the early 1990s the basis for presenting sectoral employment figures altered. In 1994 the old SIC 351 and 352 gave a motor industry employment of 200,000 whereas the new definition was

173,000. That is, 27,000 jobs were defined away into mid air. If these figures are added back into the 1998 total then 254,000 are employed in vehicle and component making. Interestingly the level of employment in the motor industry

65 on the new basis increased from 173,000 in 1994 to 227,000 in 1998, an increase of 54,000. If we increase employment by 54,000 on the "old" 1994 figure of

200,000 this again gives 254,000 in 1998. (The net impact of current contraction and growth prospects could reduce this to 250,000.)

By March 2000, and before any "BMW" or "Ford" effect on employment, employment on the new basis fell to 224,400. A year later it was 216,500. By

June 2000 the provisional total was 212,300. This net job loss of 12,000 in a period of some turmoil was less than feared, but some job losses due to BMW and

Ford are yet to come. Gross job losses were greater. In the twelve months to

July 2000 more than 60 automotive projects were funded by inward investment alone creating 7,000 jobs and safeguarding 12,000.

The Centre for Automotive Industry’s own data bank for employment in the motor vehicle and component sectors gives a total of 110,000 in the vehicle firms and 150,000 in the component and parts sector, or 260,000. The SMMT puts forward a figure of 330,000 engaged in vehicle and component production and manufacturing activities.

In the 1970s, the total official figure was just under 500,000. From 1978 to 1990 this fell by 240,000 or about 48% of the 1978 figure. Another 50,000 jobs were lost from 1990 to 1996 since then a combination of growing car production and inward investment has seen employment increase by 54,000. The changes in the

66 industry in 1999-2000 saw a fall from the 1998 official figure of 5.3% to 212,000 or 14,000 less than in 1998.

It is our view that on a narrow definition of the motor industry as contained in the official definition and corrected to represent the old style SIC, total employment is around 260,000. If motor industry employment "hidden" in other

SIC categories such as foundries, electrical, textiles is included then the figure increases towards the SMMT figure of 330,000. The pitfalls involved in trying to measure the employment total on a consistent basis over time is provided by the recent history of vehicle seat manufacture. When this was in-house the employment was included in the vehicle making total. Now that it is often outsourced the appropriate employment is included under "furniture".

The value of the cars made by this headcount is about £21bn. It must be remembered that the total turnover of many of the vehicle firms in the UK includes vehicles imported for sale in the UK – the so-called "tied imports", and an import content in UK vehicles. Correcting aggregate vehicle company (car and commercial vehicle) turnover for this gives the impressive figure of £21bn.

This includes a value added in the vehicle sector of £12.5bn. This is consistent with a figure of £30bn turnover for the motor industry as a whole which would include component and part manufacture for exports and the after market, and

"systems" such as engines and transmissions made by vehicle firms and engine specialists such as Perkins and Cummins. The value of these "systems" is under- represented in the value of UK OEM turnover. This £30bn is short of the SMMT estimate of £40bn for turnover but the latter may include the £7bn of vehicle

67 firm turnover accounted for by tied-imports of vehicles and components and the value of "linked" production (see below). A figure of £30bn for the direct value of new vehicle and component manufacture is a realistic estimate. Another £10bn could stem from indirect jobs linked to the industry.

The employment effect of the automotive sector are fourfold:

(i) direct employment in the manufacture of vehicles, parts and components;

(ii) indirect employment as a backward linkage from vehicle and parts

manufacture to raw material suppliers, fuels, services of all sorts (eg,

financial, transport, energy) and capital goods which supply them;

(iii) indirect employment as a forward linkage to distributors of UK made

vehicles and components;

(iv) the multiplier effect on employment. That is, the motor industry not only

accounts for its own employment and that in the two linkages, it also

generates income which when spent creates employment in the rest of the

economy.

In addition to this there are other job impacts but they are very difficult to measure if at all. For instance, the contribution of the motor industry to the exchequer allows the government's macro economic position to be more relaxed than it otherwise would be. This would create jobs in the economy, as would employment in the non-traded public sector. This can be taken as an unquantifiable favourable job impact of the motor industry.

68 The direct employment in the automotive industry based upon official figures corrected for changes in the basis of data collection, and the data base of the

Centre for Automotive industry Research (CAIR), Cardiff Business School is as shown in Table 13.

Table 13: Direct Employment in the Vehicle and Component Industry Passenger Cars 95,000 Commercial Vehicles (including bodies, trailers) 10,000 Vehicle parts and components ("narrow" definition) 140,000 Extra employment in "wider" definition of motor 30,000 industry Total Direct Employment 275,000 Source: CAIR Data Base

In addition there is indirect employment engaged in the "backward" linkages of the industry. This includes employment in the material industries such as iron, steel, aluminium and other metals, plastics, textiles and so on. The significance of these backward linkages is illustrated by the steel sector. Without the UK motor industry it is unlikely that two strip mills would be needed in South

Wales. Each employs around 4,000 people.

It is our estimate that around 40,000 people are engaged in the backward linkages of the motor industry. Also, the West Midlands, North West and Wales are disproportionately represented in this category.

Although a forward linkage has been identified it is our view that if the UK motor industry did not exist most of these jobs would survive selling even more

69 imported vehicles. However some jobs would be lost due to economies of scale and rationalisation in the vehicle distribution and retail sector. Also if the UK did not make vehicles, the UK government would increase the milch cow role of the vehicle user by increasing sales taxes and reducing the size of the annual car market. This would reduce the number of jobs in the forward linkage category.

However it is difficult to measure the job impact of this, so the jobs created in forward linkages are omitted from the estimate of the job impact of the industry.

So the decision to omit forward linkages means that 558,000 jobs, with 370,000 in sales alone, identified in the official statistics are sacrificed. In fact the total figure is more than this as by omitting this employment from the base headcount the impact of the multiplier effect will be that much lower. On pure methodological grounds it seems correct to omit the forward linkage for the reasons already given, but it shows the conservative approach followed in this analysis. If the intention was to examine the impact of the automotive sector with no limitation as to national location of activities then forward linkages could be included. However the purpose of this study is to show the impact of the UK automotive industry on the economy not the position of the automotive related activities.

Finally there are the jobs created in parts of the economy quite unrelated to the motor industry. The multiplier effect on jobs of any impact varies with whatever economic model is used. In short, there is no consensus on what a multiplier effect may be. However following the accepted wisdom the possibility may be the

70 creation of 50,000 jobs in any one year from motor industry activities although the total increases in subsequent years as the effect of motor industry expenditures works its way through the economy.

On a conservative estimate the job impact of the motor industry is (Table 14):

Table 14: Job Impact of the Motor Industry Direct effects 275,000 Backward linkage 40,000 Forward linkage No figure but more than zero Multiplier impact 50,000 Total 365,000

Ford and Rover Effect

The traumas in 2000 at Rover and Ford and the knock-on effects had an impact on these totals, although not as drastic as could have been. The dismemberment of Rover had some effect, but the net adverse effect initially at least was moderate. The sale of Land Rover to Ford and BMW’s plans for Mini and other production at Cowley could eventually increase employment, although Rover at

Longbridge will need to shed over 1,000 jobs, and Land Rover 1,500. The research and development facility at Gaydon has also been sold to Ford but a redundancy of 500 people will occur. The Swindon pressings plant may escape major upheaval, but the future course of events at the Longbridge engine plant remains cloudy. So the immediate net job losses within the former Rover combine could be 3,000 net. The cessation of vehicle making at Dagenham by

Ford will result in total in 3,000 net losses of jobs. So the two problem areas reduce jobs by 6,000. On the other hand VW expansion at Bentley and BMW’s

71 plans for Rolls Royce will need 1,350 extra jobs. In addition Honda is increasing employment by 1,000. So the future net job loss from these changes could be

4,650 in the vehicle plants, plus 6,000 elsewhere or almost 11,000 in total. From

March 1999 to June 2000 the official statistics showed a net job loss of 12,000.

These pre-dated the events at Rover, Land Rover and Ford where employment was concerned, so a further fall in employment is likely.

Consequently the initial job impact and the consequent knock-on effects presented in this study may have to be downsized. However, as the total modification is relatively modest the impact on the economy is not changed much at all. That is the job total remains at around 1.6% of the UK’s total employment. What could be more serious would be a major trend to source more component supplies abroad.

The motor industry itself, its linkages and the jobs created in the rest of the economy is equivalent to 9% of all manufacturing employment and excluding the multiplier effect the proportion is still over 8%. The industry supports 1.6% of all the jobs in the UK economy. It must be remembered that by deciding to ignore the impact of forward linkages, and using a very modest multiplier total the job impact of the motor industry is being presented in a very modest and conservative way. It is fair to point out that a multiplier impact of one job in the rest of the economy for every job in the basic activity is often used as a basis of calculation. If that was the case then the 315,000 in the motor industry and linked industries would create another 315,000 jobs, or 2.7% of all jobs in the

72 economy. Whichever way you look at it the economic impact of the motor industry at the employment and therefore income generation level is highly significant. If the motor industry disappeared tomorrow the UK would be hard pressed to fill the gap left. This would be especially so in the West Midlands,

North West, South East, Wales, North East and Yorkshire and Humberside. It is clear that if the net job losses in the automotive sector caused by current upheavals are limited to 12,000 then the job impact in Tables 13 and 14 are not greatly affected. This shows the localised impact of the Rover and Dagenham problems. The real danger would be if the vehicle firms try to reduce the UK content of their production.

Impact of Other Vehicle Manufacture

The manufacturing of vehicles goes beyond the confines of the motor industry as described here. The production of motorcycles, wheeled agricultural tractors and

JCB-type vehicles is in part an extension of normal motor industry activities.

This is why so many vehicle firms have been, or still are (eg, Fiat Group, Daimler

Chrysler), engaged in tractor or motor cycle (BMW) manufacture. The production of engines, transmissions, axles, wheels, engine and engine parts, lighting, seats and so on for these products have close associations with a vehicle firm’s or component maker’s usual activities. These operations have not been included in the current analysis so as not to stretch the meaning of the "motor industry" beyond bounds. However, a case could be made for their inclusion if one was so minded. To the extent that this has not been done merely reflects a

73 tendency to err on the side of caution. Nevertheless it is legitimate to highlight the type of impact that is being put in cold storage.

The manufacture of agricultural tractors in the UK has a headcount of 6,500

(much of which is in Basildon), the wheeled digger and excavator sector and motor cycles over 3,000. Adding in the supply chain and backward linkages and the multiplier would take the total to around 15,000 as a conservative estimate.

This ignores other types of vehicle (eg, forklift trucks) that a comprehensive directory of the motor industry would include.

Other Components

As the electronic and electrical component value within a car increases more and more of the value added of the motor industry will be outside the industry. That is the official definition of the motor industry in the employment statistics will increasingly underestimate the size of the industry. This is also a problem with rubber goods, plastic materials, independent foundries and other categories. The trend to outsourcing means that an activity when carried out by a vehicle firm was included in the motor industry, but when transferred to a supplier it may not be. The foundry activity has been a case in point, and the inclusion of outsourced seats under "furniture" is another.

It appears that about 20% of the value of bought-in parts or about 12% of the total ex-works cost of a car, are components and materials not included in the

Standard Industrial Classification covering the motor industry. Assuming that

74 the average value added per person in these activities is the same as that for component and parts included in the motor industry then employment in the parts and component employment should be increased by 18,000. In the case of trucks, buses and coaches the proportion is about 20% of the ex-works value of a vehicle, adding another 3,000 jobs. In addition the firms involved engage in parts and the after-market sector. This generates a total job input of around

30,000 people as shown in Table 30. It is legitimate to include these activities in the wider definition of the motor industry than that provided by the Standard

Industrial Classification which delineates the "official" motor industry. Although

"other vehicle manufacture" has so far been excluded adding the 10,000 people involved to the direct impact of the motor industry would bring the total to

285,000. In this analysis we have included commercial vehicle and bus bodybuilding, trailer manufacture within the direct impact of the motor industry and not as a forward linkage. However, as pointed out above a figure for jobs in forward linkages from car making have been omitted due to the questionable provenance of these jobs.

This shows the huge impact of the motor industry and the impact of those jobs which some people might wish to include but which here have not been.

Value of Motor Industry Impact: Summary

The total output generated by the motor industry throughout the UK economy as produced from the UK Input-Output Survey for 1997 was £33.6bn. The value of

75 total supply which includes imports, exports and taxation was £66.5bn out of a total economy supply of £1,845.5bn, or 3.5% of the total.

On the demand side the value of all other industrial purchases from the motor industry was £15.6bn. Total demand by consumers, and the industry's demand for capital goods as well as intermediate demand equalled the value of total supply at £66.5bn. The demand generated by the motor industry amounts to

3.5% of total purchases in the economy.

The compensation to employees generated by the motor industry in 1997 was

£7.7bn out of a UK total of £432.4bn. This includes wages and salaries and employers' contributions. The motor industry accounts for 1.8% of the total.

The financial impact of the industry serves to reinforce what has already been established – the impact of the motor industry on the UK economy remains huge.

The renaissance of parts of the motor industry in the 1990s has increased its proportion of manufacturing employment from 7% in 1996 to 8% in 2000. So not only is the impact of the automotive sector large in itself it is becoming more significant in manufacturing terms. The difficulties of Rover and Dagenham and their possible job effects have been shown to be marginal. This confirms the robustness of the sector as a whole. The improved efficiency of the industry is outperforming the rest of UK industry. This increases its impact in employment

76 and wealth terms but also in many other areas such as the spread of best practice, its impact on investment and the impact of the products it makes. The qualitative as well as the quantitative impact of the industry is what needs to be considered.

The productivity improvements in the motor industry have been dramatic, even if more needs to be done. In the 1990s employment increased by 20% but output almost doubled. In other words the impact of the automotive sector on the UK economy must be seen as far more than the job impact. Much of this is the qualitative impact that the industry has.

An Investment Dynamo

(i) Overall

Investment in the automotive sector in its magnitude varies from quite modest projects to the gigantic. The investment in size, quality and sophistication has a profound impact on the capital stock and efficiency of the economy on a national basis. The contribution of the industry to the nation's capital stock remains enormous. Part and parcel of this is the industry being at the forefront of Internet and E-commerce use. This will act as a driver for the rest of the UK economy.

The UK motor industry is in the throes of a major investment boom. Since 1945 there have been four periods of major increases in investment. The first was the late 1940s when new factories especially the ’shadow factories’ were brought into play. The next was the mid-1950s when major expansion took place in traditional locations. The third was the huge investment that occurred between

77 1959 and 1965 (Table 15) especially in the new locations of North West England,

Scotland and Wales:-

Table 15: Investment Between 1959-65 Ford (Halewood) 1960-1963 Standard Triumph - Speke No 1 1959-1961 Speke No 2 1960-1968 Vauxhall (Ellesmere Port) 1960-1964 Rootes (Linwood) 1960-1964 Land Rover (Cardiff) 1960-1962 BMC (Llanelli) 1960-1961 BMC (Bathgate) 1959-1961 Ford (Swansea) 1963-1965

In Table 15, the first date was when the projects were announced and the second when the first products were made. The Cardiff Land Rover plant and Ford’s

Swansea plant made transmission or axle items and BMC’s Llanelli plant was a radiator manufacturer. In addition there was expansion and inward investment by component makers. So in 1999 terms, the investment in 1959-1965 amounted to over £4.5bn.

The fourth investment boom started in 1988 and still continues. The initial

Nissan project pre-dated this. Investment by Nissan, Toyota, Honda, IBC, GM,

Ford, Jaguar, Rover and the component makers in new plant and equipment,

R&D, but not in new models, amounts to over £7.5bn. Hence, the significance of what is happening now. It more than bears comparison with the early 1960s, and the biggest single period of capital investment since 1945 (Table 16):

Table 16: The Motor Industry: The Fourth Investment Boom

78 Toyota Honda £2.0 billion Nissan (Post ’87) IBC

Vauxhall (expansion) £0.6 billion

Ford Engines (expansion) £0.8 billion

Jaguar (expansion and transformation) £0.6 billion

Component Company Investment - Domestic expansion £0.8 billion - Inward investment

Rover (expansion and transformation) £3.0 billion

(ii) The Automotive Industry and the UK Regions

As well as its impact nationwide the motor industry has been of major benefit to the UK regions. This has helped stabilise and modernise areas of the UK which have found it necessary to change the focus of their economic activity.

Investment in the regions has been secured both from the more prosperous areas of the UK and abroad. It is the latter which since 1980 has been the most significant. It is important for the effectiveness of the UK economy that it retains its ability to attract net investment in the automotive sector. The UK has a long history as the preferred location for investment into the EU from other regions – mainly North America and Asia. However, there is strong competition within the UK for those inward investment projects.

In the past, government policy sought to direct new investment out of the congested and 'over-heating' South East England and West Midlands regions into other areas of the UK. It was this policy that resulted in the creation of the

79 ill-fated Linwood plant in Scotland, and which supported the equally ill-fated De

Lorean plant in Northern Ireland. Now, while there are regional incentives available to inward investors as described above, all UK locations compete for a share of the projects available. During 1998, a number of high profile inward investments in the electronics sector floundered, leading to renewed criticism of the use of public funds to support such investments. The projects of Hyundai in

Scotland, LG in Wales, and Siemens in the north-east, all of which offered huge employment prospects, are all examples of the problem. However, new automotive projects continue to be attracted and to prosper.

The expansion of the EU will bring with it new locations competing for inward investment. It is notable just how much automotive industry investment has gone to what may be termed the EU periphery, both within the EU (eg, Portugal, former East Germany) and outside the EU (Hungary, Poland, etc). This will make competition for new investment more difficult in the future, particularly if the ’centre of gravity’ of European automotive markets shifts eastward. However the motor industry continues to play a major role in the regeneration of the UK regions.

Qualitative Impact (i): The Role of the Workforce

Training and Technology

As demonstrated, the motor industry is the most international of industries. It faces an ever more competitive environment as free trade expands and quality standards converge. In such an environment success will often depend upon the

80 calibre of the workforce. The willingness of the industry to confront this issue is of major importance to the UK economy. This is a major qualitative impact of the industry.

The fall in the industry’s headcount has produced changes in the nature of the workforce as well. The fall in employment disproportionately affected the unskilled, semi-skilled, clerical, secretarial, supervisors and foremen. In contrast a greater emphasis has been placed on professional engineers, scientists and technologists. This shows how the traditional industries can re-invent themselves and the automotive sector has been at the forefront of showing how this can be done. The modern motor industry is a high value added, skill intensive activity.

In addition although the share of supervisors and foremen in total employment may have fallen, their role and strategic importance has been increased. This is part and parcel of workforce empowerment, a bottom-up system of organisation and the spread of team working to reduce decision making time but to increase its effectiveness. The motor industry is creating a core of best practice at the heart of manufacturing. Those learning fresh skills in the automotive sector can take them elsewhere in the UK economy.

Craftsmen still maintain their share of employment in the motor industry as a whole. However, they are declining in large plants as ever greater automation and especially the spread of robotics and computer and internet aided systems

81 take on more functions. However, the role of the craftsman is as important as ever if not more so in the small and medium size plant. This shows an awareness of the fact that under-utilised capital equipment is the road to ruin and that the human input is often more cost-effective in small and medium enterprises.

The industry is taking a lead in developing general management skills training, especially in design and engineering. In addition and further down the

"hierarchy" supervisors are taking on mini business manager roles. In addition to this the existence of over sixty Japanese automotive related companies adds to the general organisational improvement. This has reached something of a critical mass with other sectors wanting to learn from the experiences of the auto sector.

At the shopfloor level the introduction of "clever" techniques ensures that auto manufacture is one of "tomorrow’s industries" in a high wage, highly developed country. The improved human capital means that high wages and low unit labour costs from high productivity, go hand in hand. Such new technology demands new types of skills. These cover diagnostics, computer awareness and multi skills as a matter of course. At the same time attitude to the job is regarded as a key element. In short, the workforce in the motor industry is much more motivated than hitherto, not least because training, organisation and empowerment are designed to create a positive attitude to the job.

82 All of this has meant the establishment of much more rigorous recruitment techniques. There is less emphasis on qualifications but more on a greater use of techniques to ensure that potential recruits have the appropriate skills, and whether they can work in teams. The demonstration effect of the motor industry in this regard cannot be over-emphasised.

Training in the motor industry is occurring at all levels. This has been so for the best part of two decades. Consequently early examples of ineffectiveness have been weeded out although there is always a chance to improve on what has been established. Training for quality improvement is widespread in the industry.

This message is being taken to other sectors although there is still much to do if

UK manufacturing and commerce is to attain the levels of achievement reached by the automotive sector. Here the entire supply chain is included in the efficiency and quality enhancements. A defective input from outside is regarded as a quality problem as much as a defect within a company’s own sphere of operation. This contrasts with an attitude in some non-automotive assembly where a defective component is not seen as a quality problem within the assembled product. However, the fact that this is now seen as unacceptable shows how far and deep the automotive industry’s influence has gone. This is no small part to the importance placed on supervisory training. Open learning made available by employers is now widespread as a way of raising the abilities of their workforces.

83 In the area of remuneration and conditions of employment there is a clearer link between pay and performance, and a willingness to reward changes in work practices. This has put the motor industry in the vanguard of workplace flexibility and the creation of an environment of flexibility and efficiency which makes the UK a favourite location for current and new inward investors. The revolution in attitudes towards the UK and the near extinction of disruptive industrial conflicts has to a major extent been due to the modern motor industry.

The emergence of high profile innovative collective bargaining in the UK motor industry has had a major impact on attitudes and efficiency. The lengthening of the collective bargaining cycle from one year to two and now three, often with flexible and "realistic" elements attached (for instance, linking the size of the annual award to sterling’s strength against other currencies). This displays a very high degree of confidence within the sector. The reduction in the number of bargaining groups, single-union arrangements and so on are now commonplace, and produce little comment.

Above all companies are providing employees with regular information on company performance and future developments in an attempt to gain cooperation and make employees more aware of the needs of the business. At the root of this is the recognition that successful companies can only be based upon trust between all those employed. The transparency of approach does this, and removes uncertainty, ignorance and apprehension. The motor industry’s

84 approach to "open government" is second to none and in most instances an example to the rest of British industry.

The result of this has been the virtual disappearance of industrial conflicts, improved work methods leading to improved quality, continuity of production and a dramatic increase in productivity. The motor industry has demonstrated that improved competitiveness depends on design for manufacture, efficient organisational and capital investment. All three factors are needed. If one is missing then the expenditure on the other two is wasted. After all a stool needs three legs if it is to remain stable.

The motor industry has demonstrated the meaning and effects of lean production. In truth this is no more than minimising inputs and maximising outputs, which is the maximising of efficiency. However, all too often this lesson had been lost and the motor industry was amongst the first activities to try to recapture what was lost: high quality, efficient production, of products the customer wanted. The onward recovery of car production in the UK is a constant reminder of the rewards from doing things right.

This includes designing products for manufacture, the correct organisation and appropriate levels of capital investment in plant and product. This requirement is taken as a given by the automotive sector. Yet again this acts as a spur to other sectors of the economy and shows what must be done if the UK is to

85 remain an economic force. The motor industry can have no greater impact on the economy than this.

Qualitative Impact (ii): Technology, Research and Development

The UK motor industry is a major user of the most modern manufacturing and control systems. The industry is a new "infant" industry in as much as it applies new thinking to both product and process.

The motor vehicle is in the throes of major change. This includes the use of new materials in the construction process and new methods of construction. To this extent the industry is a major force for change within the UK economy. The use of steel and iron reflects the latest applications whereby these materials can maintain a significant hold on the market. This has spill-over effects for their application in uses and industries other than the automotive. In addition competitive and environmental forces makes the industry look to other technical solutions and this is seeing more application for plastic-type materials, glass and metals such as aluminium, magnesium and titanium. Again where the automotive sector leads other industries follow to the benefit of the UK economy in a changing and more demanding world.

As regards the manufacturing process the industry is a leading user of robots, automatic equipment of other types and computer based control systems and methods. Part and parcel of its current thinking is the use of the internet not only within the automotive plants but in the linkages throughout the supply chain and forward to the way the car is delivered and sold on the market. The

86 automotive industry’s use of the internet and e-commerce will put it at the centre of economy-wide developments and will help to stimulate best practice throughout the economy both by its own requirements and via demonstration effects.

The industry’s use of equipment is colossal and its tentacles spread into many parts of the economy. The demands it places on the vehicle service and retail sector although sometimes controversial nevertheless stimulates the demand for new forms of garage equipment involved in sales and above all service. To this extent the general consumer satisfaction with the sales and service activities provides a benchmark for other sectors and is a driver for best practice through other sectors of wholesaling and retailing. The sheer scale of automotive activities and the solutions it demands generates plant and equipment, methods and techniques which can be modified and adapted elsewhere. The number of calls on the industry to share its experiences with others is testimony to this.

The ever-changing consumer needs and the added requirements of society transmitted via elected bodies provides the backdrop which stimulates a constant flow of massive research and development expenditures. The impact of the industry’s own efforts and its use of outside research institutions and bodies is a major stimulus to the total UK R&D effort.

A major advantage of the motor industry in Britain are the intra-company links to world best practice. The dominance of vehicle making and the upper reaches

87 of the component and parts sector by global companies means that the UK will only win investment if it is internationally competitive. This provides an impetus for the motor industry in the UK to attain best-in-class status. This is helped by the transfer of the fruits of global investment and R&D to UK operations via the internal arrangements of international companies. That is, the R&D expenditure within the UK is a poor measure of the value of R&D that these firms have access to.

The sums involved in the varied investment activities of the automotive sector be it plant, equipment, products, R&D, systems, know-how, and human capital is exemplified by the investment boom in the UK automotive sector noted elsewhere. However, the annual expenditures remain noteworthy.

Total new capital formation on an annual basis exceeded £2.4bn a year throughout the 1990s. The attraction of so much Japanese investment so that a critical mass occurred in the automotive sector and the clear success of their operation and their general satisfaction with a UK location was a priceless piece of advertising for the UK. It showed that the UK was an efficient location for new investment. This message was conveyed to the world to the benefit of further inward investment and the creation of jobs and wealth. It is noteworthy that Japanese linked component firms now account for 12% of total employment in the automotive component sector. All of this adds to the major input of automotive investment in plant, technology, R&D and product and confirms its

88 position as being at the heart of the modernisation and regeneration of the

British economy.

Qualitative Impact (iii): Efficiency Improvements

Clearly then, concentrating on the quantitative impact of the motor industry ignores the qualitative effects of the industry. The pursuit and achievement of productivity improvements means that the quantitative effects can be maintained and expanded. Consequently productivity improvements and, as we have seen already, the contribution of the workforce to the turnaround in the industry’s affairs and the establishment of an internationally competitive sector, has an impact on the UK economy in general and the industrial base in particular. Without improvement there would be no motor industry in the UK.

In the period 1980 to 1990 the automotive sector in the UK experienced major and minor plant closures. In addition manning levels were reduced in the plants that remained as throughput fell and labour efficiency grew.

The 1990s saw improved efficiencies through more exacting job standards and less downtime. In addition greater flexibility in the use of the workforce occurred thereby reducing the "stock" of idle labour by removing demarcation lines, and increasing the impact of the law of large, numbers. Multi-skilling and reduced job classifications and grading all improved labour utilisation rates and therefore productivity.

89 This was accompanied by investment in new technologies. These were introduced particularly in (a) finishing processes (eg, robotised paint plants); (b) assembly operations and (c) design and engineering functions. The result of this was to improve the effectiveness of the UK’s manufacturing base. New materials and the use of modular construction adds to this. As a result when a new product is introduced the improved efficiencies in production reduces unit costs and therefore price.

Behind this has been improvements in the level and utilisation of new techniques made possible by new organisational models. This includes: (i) collaborative working between functions often under the heading of simultaneous design, development and manufacture; (ii) links between the company and its suppliers, whether the ’company’ is a vehicle firm or component maker; and (iii) new arrangements between production workers (eg, team working). To this can be added moves to greater out-sourcing of suppliers and the internalisation of down-stream activities (eg, after market, vehicle retail).

Within the organisation the role of the supervisor has been expanded and enhanced.

The industry has been forced to re-invent itself and to challenge existing dogma.

The result is the emergence of a new industry making products of excellent quality in modern well-managed plants with well-motivated workforces.

Without this the motor industry would have continued to decline and its impact on the economy would diminish. Hence, improved productivity and the way it

90 was achieved has a greater impact on the economy than the mechanistic measurement of the job and wealth impact. Without those prior changes there would not have been a motor industry to generate those job and wealth effects.

Furthermore the success of these developments in the motor industry have been noted elsewhere. There is now a greater readiness in the rest of the economy to learn from the automotive sector and to put the same strategies and organisational changes into place. The motor industry deserves credit for being able to stem its decline and to turn matters around to such good effect. Perhaps other areas of the UK economy can do the same, but it remains to be seen whether they will be as successful. If not the outlook for the UK manufacturing sector is bleak. The quality standards that the automotive sector demands of itself and its suppliers is second to none. All too often a vehicle firm wishing to bring in a supplier used to supplying other industries, finds that the supplier has no idea of how much more exacting is the motor industry. As a result many such suppliers cannot be used by the vehicle firms or prefer to go for a quiet life with their existing customers. Interestingly, this can mean staying wedded to supplying the supposedly high quality electronic industry. However, where suppliers are willing they are able to improve their capability when they become involved with the automotive sector.

Products

91 The products of the motor industry be they components or vehicles, add up to the creation of one of the most useful and attractive ranges of products developed and made by man.

The car provides access to unprecedented levels of personal mobility. The point of departure, the course of the journey and the destination are in the hands of the individual human being either singly or in keeping with the requirements of the family and household. Whatever private and external costs are involved, the continuing attractiveness of the car, the desire to own and use one, and the universiality of this by sex, age group and nationality, shows that benefits continue to exceed costs. The aim of the motor industry to continue supplying cars whilst meeting society’s legitimate environmental concerns shows how a traditional industry can renew itself and remain as a legitimate core element in the economy.

The car allows people to escape from the limiting confines of their home and to put into effect the human being’s natural desire to travel. This must be contrasted with the position facing all past generations where the vast majority worked, lived and died within five miles of where they were born. To this extent the car is an unmitigating force for good within the economy and society. The car provided society with the means to engage in various economic activities and is a major factor in improving the quality of life. This is not to say that there are not negative influences such as congestion, emissions, noise, accidents and the unwanted intrusion of traffic and people, but the overall impact remains positive.

92 In addition the goods carrying commercial vehicle is a very cost effective way of moving a whole variety of products. They allow firms to escape the limitations of rail and water in determining where to locate. This is a crucial factor in spreading economic well-being not least through improving the economics of regional locations. Society must be careful that it does not give a green light to elements in a transport policy that re-established isolation and destroyed the viability of various locations. Inter-urban road pricing despite its various merits is a case in point.

The heavy goods vehicle is an excellent mode of efficient transport over longer distances whilst the medium truck and van comes into their own over shorter distances and in urban delivery. The industry is now addressing the issue of improving the urban delivery vehicle, including delivery to the individual household, so that it meets concerns about the health and welfare of the driver, as well as providing an efficient means of delivery. The increasing use of the internet for household shopping will have implications for home delivery and the most appropriate type of vehicle. Heavy trucks provides delivery to out of town shaping areas, and cars provide the most attractive consumer access to those products and sites. However personal shopping from home will require commercial vehicles to replace car journeys to the shops. If the economies of scale involved in visiting out of town shopping centres and supermarkets are not to be lost, then highly efficient home delivery vehicles must be developed. The

93 motor industry is responding to this need. This is merely the latest example of the automotive sector’s ability to meet whatever challenge is thrown at it.

The bus and coach remains the most cost-effective way to supply passenger and seat kilometres. Rail based transport is technically impressive but seldom economically efficient. The bus and coach is often the only economically viable method of providing mass transport. The UK remains a centre of bus and coach chassis and body manufacture, with its own component and parts infrastructure.

As said above if transport policy does provide a further stimulus to bus and coach usage then the manufacture of those vehicles in the UK will have favourable implications for the balance of payments as well as economic activity generally.

In addition the UK based operations have been at the forefront of developing passenger friendly products such as low floor double and single deckers to help the elderly and infirm.

The social and environmental role of ambulances, fire engines, rescue and refuse vehicles goes without comments, but their role is central in a modern, well ordered society.

In short the contribution of the products of the British vehicle, body and component plants to the wellbeing and welfare of the UK economy is central.

These are just the product that should be made in a modern, high income economy. Without the contribution of the automotive sector in the UK those products would be sourced abroad to the cost of job creation, research and

94 development, capital investment, and the balance of payments on the visible and invisible trading accounts and the capital account. The activities of the UK motor industry in making products that UK and foreign customers want is a positive economic contribution under all those headings. In short if it is economically viable to engage in automotive manufacturing activities it is in the

UK’s national interest to do so without equivocation. It is time UK decision makers fully realised this, and also a British society determined to travel and to demand transport services.

95 Ford

96 Ford in the Scheme of Things: Its Position

Although market share is not everything it is a good reflection of the competitiveness of a company. If prices, quality and products are acceptable then it is that much easier to sell products, and as a by-product to achieve a good share of the market. The position in Table 17 encapsulates the problem Ford of

Europe faces.

The market share for Ford, net of the contribution of Volvo and Jaguar, fell to

8.8% in the first half of 2000. This contrasts with a share of 11.7% in 1990. This fall of a shade under 25% is bad enough but is even more dire when considered against Ford’s 1984 production of 12.8% when it led the West European market: a fall of 31%. Ford is now firmly bottom of the volume market held by the leading six groups. In the year to August 2000, the Daimler Chrysler Mitsubishi group had 7.0% of the West European market compared to the Ford brand’s

8.5%. On an annualised basis if Ford had the market share in 2000 it had in

1990 it would have sold 450,000 more cars than it did. The seriousness of Ford of Europe’s position is clear, and even more alarmingly is a product of its own shortcomings rather than any overall malaise in the market, no matter how competitive that may be. The financial implications of a fall in market share which is of such a magnitude to more than offset the overall market growth are such that if they continue, the continued viability of Ford of Europe will be put at risk.

97 Table 17: The Market – Marque Trends 1990 1993 1995 1997 1998 1999 2000 % % % % % % (first 6 months) VW 15.5 16.3 16.8 17.1 18.0 18.8 18.4 GM 12.1 13.2 13.1 12.1 11.5 11.5 11.2 PSA 13.2 12.4 12.0 11.3 11.4 12.0 12.9 Ford 11.7 11.6 11.9 11.3 10.2 9.7 8.8 Volvo 2.0 1.5 1.8 1.7 1.7 1.6 1.5 Renault 9.9 10.6 10.3 9.9 10.7 10.8 10.8 Fiat 14.6 10.4 11.1 11.8 10.9 9.7 10.7 Rover 2.8 3.2 3.1 2.9 2.6 2.0 1.6 BMW 2.8 3.2 3.3 3.3 3.1 3.2 3.3 Mercedes 2.8 3.1 3.4 3.8 4.4 5.6 5.7 Toyota 2.7 2.8 2.5 2.7 3.0 3.1 3.7 Nissan 2.9 3.5 3.1 2.8 3.0 2.6 2.7 Japanese (total) 11.8 10.1 11.6 11.8 11.6 11.6 Korean 1.5 2.2 2.7 3.1 3.5 Source: EIU

Unlike Fiat, Volkswagen, GM and Daewoo, Ford has not been a major participant in East European car production. This has hindered sales in that area, and it is well behind its aforesaid rivals. Currently, therefore, Ford’s

European operations are a drag on its global performance, a performance which is over-dependent on the continued prosperity of the North American light truck market, which reflects the demand for non-car personal transports.

In terms of plant productivity and therefore unit costs of production Ford is off the pace in Western Europe. The position is summarised in Table 18.

98 Table 18: Plant Productivity (Vehicles per Employee) (1998) Company Location Country Vehicles Per Head No 1 Nissan Sunderland UK 105 No 2 VW Navara Spain 76 No 3 GM Eisenach Germany 76 No 4 Fiat Melfi Italy 73 No 5 Toyota Derby UK 72 No 6 Seat Cordoba Spain 69 No 7 Renault Douai France 68 No 8 GM Zaragoza Spain 67 No 9 Renault Valladolid Spain 64 No 10 Honda Swindon UK 64 No 11 Ford Dagenham UK 61 No 12 Fiat Mirafiori Italy 61 No 13 Ford Saarlouis Germany 59 No 14 Renault Flins France 58 No 15 PSA Mulhouse France 58 No 16 PSA Aulnay France 58 No 17 Ford Valencia Spain 58 No 18 Renault Maubeuge France 56 Source: EIU

The first Ford plant in the table comes in at number eleven. So although

Dagenham was marginally ahead of Saarlouis and Valencia, it was behind the plants of six of Ford’s major competitors. In the case of GM, Renault and VW-

Seat two of their plants were ahead of the best Ford could deploy. In fairness both Valencia and Saarlouis were in the process of reorganisation, but even so

Ford’s plant productivity did not compare favourably with many of its rivals.

99 Table 19: Relative Performances Vehicles per Revenue per Revenue per Car Head Employee (Ecu) Made (Ecu) (1998) BMW 9.3 269,171 26,808 Rover 13.5 210,292 15,553 Fiat 17.1 265,170 15,484 Ford (Eur) 16.4 240,686 14,646 GM (Eur) 21.6 257,716 11,929 Mercedes Benz 10.0 342,483 34,395 PSA 16.7 241,674 14,460 Renault 17.8 271,804 15,307

VW 15.6 256,256 16,395 Audi 14.7 147,329 10,017 SEAT 29.0 277,090 9,566 Skoda 19.0 106,359 5,608 Source: EIU

Of course a productivity measure based on vehicles per head is all very well, but is not always the most relevant in a market economy guided by financial indicators. As the Japanese manufacturers are finding it is of limited use to make large numbers of cars per man if the cars are difficult to sell and have to be heavily discounted. Table 19 shows that neither BMW nor Mercedes have world class vehicles per head figures but such is the value of each car that productivity in terms of revenue per employee and car are impressive. As the revenue figures are shown in Ecus, and as the high pound earns 30% more Ecus per £ than in

1996, the Ford of Europe figure is poor. That is, the large revenues earned in the

UK are offset by a weak sales performance throughout Western Europe. Apart from the Focus, Ford's mainstream cars have been weak contenders and do not generate strong revenues per employee or per car. This shows the need for new products.

100 101 Car production in the UK has recovered strongly since the low point of 1982

(Table 20).

Table 20 Production Exports 1982 887,679 225,865 1991 1,236,900 605,385 1996 1,686,134 908,212 (50%+) 1998 1,748,258 1,020,727 1999 1,786,623 1,138,477

The growth in output is export led and continued into the first half of 2000 despite the high pound. In 1996 exports exceeded 50% of production and in 1998 they exceeded one million units a year for the first time. In 1998 when exports achieved this landmark all the major UK-based producers except Peugeot and

Ford exported over 50% of output. The Japanese exported over 75% of output from their UK factories. However, Ford sold 183,000 cars on the home market but exported 115,000 from UK production. So the weak financial performance of

Ford UK could not be laid at the door of having to cope with a high pound where the majority of UK production was concerned. More to the point, Ford was having to engage in severe price competition to hold their position against strengthened competition. Clearly Ford of Europe of which Ford UK is an integral part has problems many of which are long established and deep seated:

(i) Ford has had an overcapacity problem for over a decade. The only

surprise is the length of time the company has taken to address this.

(ii) Ford’s products are tempting fewer and fewer customers. The growing

market can hide the problem no more. The West European market has

been growing but Ford’s share has fallen dramatically.

102 (iii) Ford has not gained as much business as rivals in Eastern Central

Europe.

(iv) Apart from Focus, the heart of the model line up looked tired. In Western

Europe, the supermini, light medium and upper medium categories

account for 80% of sales. Only the Focus light medium car has been

punching its weight. The new Mondeo must be a success.

(v) The company lacks products in major segments of the market. As

indicated above the ’B’ (supermini) and C/D (upper medium) cars are tired.

There has been a lack of competitive diesels, whilst in Europe diesels

cover 30% of the market. There is no multi-purpose vehicle (MPV) off the

’C’ class Focus, and no prospect of one until the next Focus. The run out of

Scorpio whilst not unjustified, was unaccompanied by any strategy to

divert customers to Volvo or Jaguar.

(vi) Defective product planning, exaggerated sales expectations and

lengthened model life cycles added up to Ford getting it wrong. Much was

down to the planning inadequacies by Ford’s top management. (A top

management led by people now at the top of the company in Detroit.) As a

consequence Ford, apart from Rover, had the poorest capacity utilisation

in the European motor industry. European overcapacity was largely a

Ford and Rover problem. Idle factories, dowdy products and falling

market share was the reality. Ford’s internal problems were of no concern

to consumers who are only interested in value-for-money products.

103 (vii) The company’s traditional genius for cost control has evaporated. Ford

became a high cost producer of mass market, low expectation, low margin

products. This was a disastrous combination.

(viii) The rapid price depreciation of Ford products in recent years has made the

cars high cost ones for the consumer. This contrasted with the previous

position where the reverse was so.

(ix) The Ford brand does not mean much in terms of "must have" attitudes to

cars. The brand is attached to model names. So ending Escort was

tantamount to leaving the market. VW would never drop Golf, or Toyota

the Corolla name.

(x) Ford is doing badly in a major upturn in the West European market. Just

consider what its plight would be if the market fell. The market will turn

down eventually and this could prove terminal if no immediate

improvements occur.

(xi) During the last twenty years all the other major European "Big Six"

makers hit trouble. Ford of Europe did not experience this until now. The

other firms had to take drastic action or die. The same issue faces Ford.

This could be Ford of Europe’s last chance for survival as a major force in

Europe. The company does not have the time that the others had to

recover as the market is too competitive, too open and too demanding for

that now. To survive a company must have the best products, costs and

distribution to serve that demanding entity – the customer.

104 These problems faced by Ford of Europe must be solved by Ford of Europe. In a global enterprise where there is competition for resources there is no room for cross-subsidisation of the weak by the profitable. If Ford does not improve, and as cross-subsidy is not an option, then a form of receivership would be inevitable.

The parallels between BMW and Ford of Europe are uncomfortable. BMW bought Rover to achieve scale. Ford needs of Ford of Europe to be a global player and reach the scale necessary. However, for BMW to have even a short-term future required it to stop cross-subsidising Rover even if the "scale" strategy was abandoned. Equally Ford cannot cross-subsidise Ford of Europe as this would weaken its strategic position as funds evaporated. But to be a global player Ford needs Europe.

BWM exited from Rover but if Ford backs out of Europe it will be greatly weakened as a global player. Therefore, it is imperative that Ford of Europe is turned around for it to survive and contribute to global profits. This is the strategy being planned by Ford but it means matching capacity to demand as well as introducing new models. A major element in Ford’s survival strategy in

Europe is therefore the closure of Dagenham as a vehicle manufacturing plant.

So the competitiveness of the market has found Ford wanting. Dowdy products leading to falling market share equalled chronic excess capacity and some idle factories. This excess capacity meant a poor cost base and a further erosion of profits. To give itself any hope of financial recovery Ford has attacked its

105 overcapacity and poor cost base. A central feature of this has been the closure of

Dagenham’s body and vehicle assembly.

Why Dagenham?

The desperate state of Ford of Europe’s finances was confirmed by Ford breaking its commitment to bring the new Fiesta to the UK, and to expand Dagenham’s capacity and add extra models. These were undertakings entered into in 1997 and 1999. No multinational company wants to leave itself exposed to the charge of betraying an undertaking. The fact that Ford has done so, and felt compelled to take such action, illustrates the magnitude of its problems. This point has been missed by commentators.

Although productivity at Dagenham was little different to that at Cologne and wage rates per head were less, as labour costs account for only about 10% of the unit costs of car assembly, the high value of the pound was unhelpful to

Dagenham’s case. As the pound had been high since 1997 it was more and more likely that this would continue to be the case. In European terms this made

Dagenham a high cost and low profit option. (Despite Ford’s protestations that the pound was not an issue, this was done to avoid politicising issues. Reality is different.)

The location in the crowded, congested and expensive south east with a tight overall labour market, notwithstanding the local position in the East London

106 boroughs, was not helpful either. In addition it made it difficult to apply true just-in-time low stock solutions to Dagenham’s production system.

The availability of the old Scorpio assembly hall in addition to the existing Fiesta facility made expansion at Cologne a lower cost option for expansion.

The new Fiesta would be a major export product. As well as the problem of the high pound, Cologne’s more central position gave logistical and transport cost advantages in serving the potential market. This was especially so where

Eastern Central Europe was concerned.

The flexible labour market in the UK attracted inward investment but it also helped exit from investment. This is one of the features of a contestable market: easy entry is helped by the understanding that there is easy exit as well.

Ford will use the UK for components, vans and the Premier Automotive Group.

The expansion of Jaguar, Land Rover and Aston Martin makes Ford a large player in the UK, and highly dependent on the UK. Reducing mass market production reduces the dependency on one particular national location.

The UK has had a good record as a major systems and component market for

Ford. The Bridgend plant has always operated in isolation to the assembly plants. Concentrating on engines and wheels at Dagenham fits in with the UK comparative advantage.

107 The fact that in 1997 Dagenham was chosen as the lead plant for the new Fiesta, and in 1999 expansion of capacity and model lines was agreed showed not only the subsequent deterioration in the affairs of Ford of Europe, but also that

Dagenham’s disadvantages were marginal. By 2000 these marginal disadvantages were enough for Ford, desperate to match long term capacity with demand and to save the European operation from disaster, to decide that

Dagenham body and assembly was the marginal operation in Europe.

The Impact Effect

Given that the decision has been made, it is imperative to have some idea as to the employment implication of the Dagenham run down. Downsizing is nothing new to Ford UK or to Dagenham. In 1975 over 28,000 worked at Dagenham with 15,400 in body and assembly. By 2000 the figure was almost 7,300 with

1,900 in body and assembly following a further loss of 1,500 when single shift operations were introduced in 1999-2000.

In making any estimate of the job losses in Dagenham but especially the knock- on effect the local content of the product must be considered. The last time authoritative figures entered the public domain was in 1987 but they still give a good indication. The Fiesta had a 70% UK content on an ex-works cost basis compared with 80% for the Escort, Orion and Transit ranges. In terms of the UK content of total externally purchased materials and components the Fiesta UK content was 52% compared with 70-72% for Escort, Orion and Transit. In short,

Fiesta production had a much smaller influence on the UK supply industry than

108 did other Ford products made at Halewood and Southampton, and Rover and

Japanese UK output.

As the Fiesta UK content was on a falling trend, and as current Fiesta production uses Spanish engines the likelihood is that the UK content by whatever measure is lower than in 1985. However, in 1985 Ford spent £1.4 billion on UK supplies, more than any other UK based vehicle maker. By 1996 the figure was £2.6 billion in money terms. Another £200 million was spent by

Ford companies abroad, a figure that had doubled by 1996. Significant as the latter was, most of Ford's spend was for UK production. In the future only export business will exist for original equipment sales to Ford car assembly plants (excluding PAG vehicles).

The local content of Fiesta production means that any cessation of output has that much less effect on the supply chain. In short if components for the car were not made in the UK in the first place, there will be no job impact in that particular area. The average local content of all car production in the UK is around 72%, so the job impact on the supply chain is around two-thirds that of the UK average per car. So it is not sound to use average job multipliers for the reduction in Fiesta output for two reasons. One, they are average not marginal figures. Two, the Fiesta impact is less than the average where the national impact is concerned. This does not preclude the necessity to look at the local and regional impact.

109 The Job Impact

There have been studies into the economic impact of the UK motor industry which includes an analysis of the job significance of automotive manufacturing activities in the UK. This is similar to the analysis already presented above.

In 1984, the PEIDA study for the Society of Motor Manufacturers and Traders,

The UK Vehicle Manufacturing Industry: Its Economic Significance concluded that for every job in the car makers another 3.2 jobs existed in the UK economy.

This includes component making and other related jobs, as well as the multiplier effect. The ratio for large and medium commercial vehicles was 1 to 4.3. In the car sector there was 122,000 employed by the vehicle makers, 164,000 in the supplier industry and 229,000 in jobs elsewhere through the multiplier effect.

The link between cars and the supply chain alone was therefore 1 to 1.35.

This has come to be regarded as a generous interpretation of the importance of the vehicle industry, especially given the size of the multiplier where the ratio of car jobs and car component jobs to the wider economy was almost 1 to 0.6. The car alone multiplier was 1 to 0.8 in the rest of the economy. (122,000 car jobs and 97,000 "multiplier" jobs.)

A subsequent study by the Institute of Manpower Studies in 1989 for the SMMT confirmed that the vehicle industry was significant, but not as great as the

PEIDA analysis.

110 In this second study the employment link between employment in the vehicle firms and the supply chain was 1 to 1. The multiplier effect linking employment in vehicle and component making to the total employment effect in the economy was 1 to 0.6 as before, but the vehicle alone multiplier was not calculated in the second study. However in the PEIDA study the ratio between vehicle industry employment and overall employment including supply chain and multiplier was

1 to 3.5 but in the second study it was 1 to 2.7. Also in the PEIDA study the ratio between vehicle and supply chain employment was 1 to 1.5 and in the IMS study it was 1 to 1.4.

The effect of the vehicle industry on the supply chain was not too dissimilar in the two studies but the overall impact via the multiplier was significantly lower.

In neither was there a relationship remotely similar to claims heard during the

Dagenham "crisis" that ther were five jobs lost in the economy for every one job loss in the vehicle industry. Claims that 45,000 extra job losses could result from a loss of 9,000 jobs at Dagenham using an average nationwide link between vehicle manufacturing jobs and overall employment, cannot be sustained on the basis of the PEIDA or IMS reports. Also, the Cardiff data base indicates that the opening employment at Dagenham before single shift came in was just under

7,300 not 9,000.

The job losses from the Cardiff view of the economic impact analysed above would be less as there the link between vehicle jobs and total jobs is 1 to 1.8.

This is even further away from 1 to 5.

111 Assuming 9,000 Jobs at Dagenham

The actual job loss at Dagenham compared with early 1999 is 4,000 not the 9,000 figure. (That is the headcount at the start of 1999, according to the Trade Union figures, was just under 9,000, after body and assembly closes some 5,000 jobs

∗ will remain .) On a one to five basis this reduces the extra job loss to 20,000, or

24,000 in all. However the IMS and PEIDA studies suggest that this is an overestimate of the ratios. The IMS ratio suggest that 4,000 direct job losses at

Dagenham produce an extra 10,800 job losses (multiply by 2.7) or 14,800 in total.

PEIDA would give an extra 14,000 (multiply by 3.5), and the Cardiff study an extra 7,200 (multiply by 1.8), or 11,200 in total. None of these figures are anything but significant, but they are considerably less than 54,000 or 24,000.

However it does appear that the headcount at Dagenham was about 7,300. The job impact on this basis needs analysing and will be used in the rest of this report.

Assuming 7,300 Job Losses at Dagenham

On the basis that the total job loss will be five times the initial loss then if all

7,300 jobs at Dagenham disappeared then the total loss would be 36,500 plus the

7,300 at Dagenham or 43,300. This is less than the figure of 54,000 sometimes mentioned.

∗ This after the change to single shift, the extra job losses announced on May 12th 2000, and the modified figures of October 12th, 2000.

112 Following the extra jobs promised following the closure of vehicle and assembly, some 5,000 jobs will remain on the Dagenham site. Therefore, 2,300 jobs have been lost at Dagenham compared with early 1999.

On the basis of a one to five ratio as used in the Trade Union document this reduces the extra job loss from 45,000 to 11,500 or 12,800 in all.

However using the lower Institute of Management Studies and PEIDA ratios the figures are as follows:

(i) The IMS ratio suggests that 2,300 direct job losses at Dagenham produce

an extra 6,210 losses or 8,510 in total.

(ii) PEIDA would give an extra 8,050 or 10,350 in total; and

(iii) Cardiff’s Centre for Automotive Industry Research would give an extra

4,140 job losses or 6,470 in total.

"Average" and "Marginal" Correction

The above analysis is based upon ratios for the entire motor industry. As a result they cannot give a precise estimate of the reduced employment that would stem from reduced employment at Dagenham. Using the ratios we have to estimate job losses assumes that the relationships encapsulated in the national ratios held for any change in the volume of output and employment. However, the ratios are an average relationship. They show for a given level of output the associated level of direct employment. In considering a change in production however it is the marginal relationship that matters most: this is the change in

113 employment which accompanies less (or more) production at the margin. This can often be very different from the average relationship.

To illustrate this point. If a supplier to Dagenham was experiencing excess demand for its products so that it was using unwanted overtime, a fall in demand would reduce output but not employment as more efficient work patterns returned. In other words, there may not be pro rata changes in employment in the vehicle firm with outside. If a supplier goes below a critical mass then a more than proportionate employment reduction could occur. Also, the relationship between output and employment is always changing. For instance, lower levels of employment will be associated with any given level of output as efficiency increases.

Local Content Again

The relatively low UK content of each Fiesta produced compared with the average means that the job impact of each car on the supply chain and the multiplier will be less. At the very least a correction must be made for the Fiesta having a UK materials and components content of under 50% compared with a

UK average of 72%. Therefore, the knock-on effect should be weighted by a coefficient of five over seven. Therefore, and taking the IMS ratios, a fall in employment at Dagenham of 2,300 creates a knock-on job loss of 6,210, but multiplied by five-sevenths. On an IMS basis this gives a figure of 4,435 to add to 2,300 or 6,735 in total. The Cardiff research previously cited so modified, would result in a figure of 2,957 or 5,257 in total.

114 Regional Impact

Just over 30% of Ford’s UK employment is in London plus another 20% in the wider South East of England. If we use this proportion and apply it to the regional distribution of Ford’s supply chain then half of Ford’s knock-on effect is in London and the South East. Therefore, on the basis of the IMS figures modified for local content, some 2,218 additional jobs will be at risk in London and the South East. However, it must be remembered that the cessation of body and assembly at Dagenham is not a threatened total closure of operations like

Rover, but a transfer of production. The Fiesta no longer to be made at

Dagenham will still be made but at Cologne.

Competitiveness of Suppliers

So although 2,218 jobs may be at risk in Dagenham and the South East and

4,435 in the UK as a whole, the precise job loss will depend on the extent to which UK suppliers can win business on the new Fiesta and supply Cologne.

Hence the knock-on jobs most at risk are those tied uniquely to the Dagenham plant. These can include site maintenance, road haulage, power supplies, catering and so on, on the one hand, and on the other second and third tier suppliers unable to compete with German or other continental suppliers.

115 Pointers from the Rover Saga

In contrast to the exaggeration estimates of the potential job losses from a closure of Longbridge the Rover Task Force, after a clinical look at the subject, estimated that Longbridge supported 24,000 jobs in the West Midlands, 9,000 of which were in Longbridge itself, a local job impact ratio of just under 1 to 1.7 (ie,

Rover accounts for another 15,000 jobs). We could make the heroic assumption that a job loss of 2,250 would result in a total job loss of 6,000 to ease the comparison with Dagenham. This is not dissimilar to the more robust of the

Dagenham estimates of between 5,257 and 6,735 job losses in total, based on

’Cardiff’ and IMS methodology respectively.

In detail some 9,000 Rover jobs at Longbridge created 8,500 to 11,500 jobs in the supply chain in an area where the supply chain was highly dependent on Rover.

Another 5,500 to 6,400 jobs in the area are lost through the multiplier effect.

This produced a total of 23,000 to 26,000 jobs in the region. As the initial job loss here is four times the position at Dagenham, then the figures from the task force and in this report show a reassuring comparability. In addition, the Dagenham figures which corrected for the regional incidence, and the possibility that South

Eastern suppliers could obtain business in supplying Cologne, can be reduced further.

Dagenham’s Future

This report has assumed that 5,000 employees will continue to work in

Dagenham making diesel engines, wheels, and press parts. Given the track

116 record of falling employment and dashed expectations at Dagenham, it is unsurprising that there is doubt about the future. However, as Ford’s engine plants at Bridgend, its transmissions plant at Bordeaux shows, long-term activities do exist which are sited quite separately from vehicle making. There is no reason in principle why Dagenham should not prosper as an engine making centre. After all 30% of West European new car production uses diesels.

Whether the same can be said for wheels and pressings remains to be seen. For instance, recent closures by other companies have seen wheel production move to

Eastern Europe, and vehicle firms have outsourced small pressings manufacture.

However the engine position is reassuring and it is often forgotten that the UK is a major centre for engine manufacture (Table 21). This has been a long-term strength, and continues to be built upon.

Table 21: Engine Manufacture 1990 2002 Ford 1,100,000 1,500,000 Rover, Land Rover, BMW 400,000 800,000+ GM - 100,000 Nissan 100,000 300,000 Toyota - 250,000 Honda 75,000 250,000 Jaguar 50,000 100,000+ Perkins 300,000 300,000 Cummins 30,000 30,000 Others 5,000 14,000

Conclusion

The pace of change in the global and European motor industry in the last decade has been enormous. There have been periods like this before, but the turmoil this time affects vehicle firms, component makers and retailers alike, as the

117 consumers assert their sovereignty. It is only the consumer that can "guarantee" the survival of a company and its individual plants.

Ford has not done well in the European market of the last decade and even in the UK it struggles to maintain a market share much reduced compared with ten years ago. Such is the dire financial position of Ford of Europe that Ford felt its survival depended upon drastic action. This meant the closure of body and assembly at Dagenham, which following upon the transfer of Halewood to

Jaguar has meant the cessation of Ford branded car production in the UK. A book opened in 1911 will close in 2002.

The job impact of this is of major concern. However it does seem that figures like

45,000 or 54,000 job losses are a considerable over-estimate. Although such calculation are dependent upon assumptions and leaps of faith it does appear as if the total job loss in the UK is more like 5,300 to 6,700 in round numbers, with

London and South Eastern experiencing just over 2,210 job losses, including those generated by Dagenham’s switch to single shift. Of course if local suppliers can win business in Cologne the figure will be less.

Clearly the job losses are not trivial but they are not the catastrophe they could have been, and not as high as some would have it. This report does not try to gloss over the issue, and by including job losses already experienced during the move to single shift it increases the job losses compared with those emanating from the closure impact. However, a well considered and comprehensive job

118 creation and enterprise initiative could deal with the type of job losses identified here. This has after all been the task and role of agencies like Scottish

Enterprise and the Welsh Development Agency.

Endpiece

This report has looked at job losses at Dagenham and in the wider South East.

However it does seem that the job losses to the South East and the UK as distinct from the Dagenham plant could be even lower than 2,300.

These extra job opportunities are made up of the following developments:

(i) Transfer of Transit engineering from the USA. This creates 300 jobs in the UK.

(ii) Extra jobs at Southampton: 40

(iii) Extra engineering at Dunton:240

Total 580

At present it is not entirely clear how these developments will be finalised.

However, it is clear that there are extra jobs for the South East and the UK if not precisely at Dagenham.

All of this is in the right direction in that it reduces the regional South Eastern and UK job losses directly and indirectly. This could reduce the total job loss within Ford to 1,300. This is 1,000 less than the 2,300 impact used in the report.

The knock-on effects would be reduced as well.

119 Professor Garel Rhys Director, Centre for Automotive Industry Research Cardiff University Business School

120